3.3 Decision-making techniques Flashcards
Name 4 things sales forecasting helps with in business planning
-HR plan: HR department considers s.f. to ensure right no. of staff with right skills are employed
-cash flow forecast : to estimate cash inflows, & outflows, cash flow forectasts have to be based on s.f
-profit forecasts & budgets: s.f used to plan how much firm is expecting to make in rev & profit -> companies then know how much they are able to spend
-production planning: working backwards frm s.f. allows a business to ensure enough products are brought -> to satsfy demand
What is a moving average
quantitive method used to identify underlying trends in set of raw data
What does forecasting sales using extrapolation mean
assuming past trends will continue
What is correlation
relationship between two sets of variables.
Name 2 limitations of quantitive forecasting techniques
-future may not be like past -> external factors changing- impact sales, unpredictable
-quality of a forecast is reliant on the ability of the forecast to interpret data being used to generate forecast
Name the 3 methods of investment appraisal
-payback period
-average rate of return
-net present value
What is investment appraisal
process of using cash flows to assess financial attractiveness of an investment decision
What is the payback period
assessing period of time a business must wait until initial investment has been recovered
-quicker paybacks are best -> as once paybacks occurred a firm isn’t losing money on its investment
Give the formula for payback
outlay outstanding/ montly cash flow in year of payback
What is average rate of return (ARR)
considers profit generated by an investment
-higher the ARR the higher the more profitable the investment
Give the formula for average rate of return
average annual profit/ initial outlay x100
What is net present cash flow
It calculates the monetary value now of a projects future cash flows
Give the formula for present value
cash flow x discount factor
Name 3 strengths and weakness of payback method
+easy to calculate
+takes into account timing of cash flows
+useful for businesses with weak cash flows
-tells us nothing about profitability
-may encourage short-termist attitude
-ignpres what happens after payback is achieved
Name 3 strengths and weakness of average rate of return method
+clear focus on profitability
+considers cash flows over whole projects lifetime
+easy to compare with other measures of return
Name 3 strengths and weakness of net present value method
What is time series data
series of figures covering an extended period of time
-allows business to predict future from past figures
What is extrapolation
predicting future trends by projecting past trends
What would be the NPV if:
cash flow = £20,000
discount factor = 0.9
20,000 x 0.9 = £18,000
-tells us the value of the cash now discounted from future
How do you calculate net present value
calculate all present values (cf x df)
add together all the present values
What does a positive net present value show
shows project generates a greater return on its initial investment
What is a decision tree
a diagram showing the options & possible outcomes involved in making a decision
-as well as the probability of the outcomes occuring
Explain the two branches shown in a decision tree
-a square
-a circle
square: a decision to be made
circle: chance events beyond firms control -> include probability
What is expected value
average outcome expected knowing a chance event
