3.3 decision making techniques

Question 1

what is quantitative sales forecasting

Answer 1

involves estimating possible future sales figures on the basis of available primary or secondary qualitative data

Question 2

what can a business with with QSF information

Answer 2

• organise production
• organise resources
• organise marketing to reinforce the sales predictions

Question 3

how would a moving average calculation be beneficial for a business

Answer 3

• when there are strong seasonal influences on sales
• when sales are erratic for no obvious reason

Question 4

define extrapolation

Answer 4

use of trends established by historical data to make predictions about future trends

Question 5

limitations of quantitative sales forecasting techniques

Answer 5

• past performance is no guarantee of the future
• need to appreciate SWOT and PESTLE analysis factors that may affect future predictions
• doesn’t account for rapidly changing and dynamic markets
• time consuming
• doesn’t always link with corporate objectives

Question 6

define investment appraisal

Answer 6

= attempts to determine the value of capital expenditure projects
= enables business and investors to compare projects so that the business can expand and meet their objectives
- objectives are usually profit maximisation and efficiency

Question 7

investment appraisal - planning

Answer 7

= planning process used to determine whether the long term investments will give the best return
- new machinery
- new premises
- research and development projects

Question 8

investment appraisal - decision making

Answer 8

lots of proposals and projects, with only a finite amount of money and resources
- investment appraisal used here to determine which project gets the funding

Question 9

payback period

Answer 9

= time taken for a project to repay its initial investment
= focuses on cash flows and looks at the cumulative cash flow of the investment

Question 10

advantages and disadvantages of payback period calculation

Answer 10

+ simple and easy to calculate
+ emphasises speed of return
+ straightforward
- ignores cash flows which arise after payback has been reaches
- short terms
- ignores qualitative aspects of decision

Question 11

average rate of return - ARR

Answer 11

compares the average annual profit generated by an investment with the amount of money invested in it

= (total net profit / no. of years) / initial cost x100

Question 12

advantages and disadvantages of ARR

Answer 12

+ can be compared with a target return
+ looks at the whole profitability of the project
+ focuses on profitability
- doesn’t take into account cash flows
- no account of the time value of money

Question 13

what is NPV - net present value

Answer 13

= takes into account that money in the future is not worth the same as it is today, adds in a discount to make it more realistic

Question 14

NPV calculation

Answer 14

present values added together minus the initial cost

Question 15

advantages and disadvantages of NPV

Answer 15

+takes the opportunity cost of money into account
+ takes the amount and timings of cash flow into account
- complex to calculate and communicate
- meaning o result is often misunderstood
- only comparable between projects if the original investment is the same

Question 16

what are decision trees

Answer 16

= diagrams that set out all the options available when making a decision, plus an underestimate of the likelihood of that choice occurring

Question 17

decision tree analysis

Answer 17

square = decision
circle = chance event

Question 18

compare actual value and expected value

Answer 18

actual - forecasts of the net cash flow that result from following a sequence of decisions and chance events

expected - forecasted actual values adjusted by their probability of their occurrence

Question 19

limitations of decision trees

Answer 19

• based on predicted data of the potential impact of a decision
• don’t take into account unforeseen costs and circumstances
• probabilities and net outcomes are all estimates