3.3 - Decision-making techniques

Question 1

Critical path analysis

Answer 1

A process that identifies which activities are ‘critical’ and which activities are ‘float’ (activities that can be delayed without delaying project)

Question 2

How can a critical path analysis be used?

Answer 2

• Helps identify how long a project will take
• Helps to schedule tasks
• Determines most efficient way to complete collection of small tasks

Question 3

How to calculate the earliest start time

Answer 3

EST = EST of previous activity + duration of previous activity

Question 4

Time series analysis
and components

Answer 4

Basic tool to forecast future activity levels and make decisions based on this forecast

• Trend (underlying movement of sales, up down etc, due to pop, tech etc)
• Seasonal (regular patterns within a year, e.g. sunscreen, swim costume, scarves etc)
• Cyclical (long-term variations due to economic changes e.g. booms/slumps)
• Irregular (unpredictable events e.g. covid)

Question 5

Uses of time series analysis?

Answer 5

• Identifying trends
• Forecasting
• Unemployment
• Economic growth
• Foreign debt
• Trade figures

Question 6

Moving average limitations

Answer 6

• Relies on past continuing & historical data not always a good indication of the future
• Rapid change/ short product life-cycle is misleading data
• Time-consuming
• Complex
• Only as reliable as data put in
• Doesn’t account for how recent data is
• Doesn’t link with corporate objectives

Question 7

Time series forecasting

Answer 7

Technique for the prediction of events through a sequence of time

Question 8

How is variation calculated

Answer 8

Actual sales - trend

(Sales - moving average)

Question 9

Average cyclical variation points

Answer 9

Find the average of each cycle points variations

Question 10

4 point moving average

Answer 10

Add 4 sales then divide by 4

Question 11

Latest Finish Time

Answer 11

LFT of following activity - duration of following activity

Question 12

What is float

Answer 12

When there is a difference between EST and LFT

0 float = critical

Question 13

Free float

Answer 13

Found by taking the EST of the task at the start and duration of activity away from EST at the end

EST @ end of activity - duration - EST @ start of activity

(Spare time available without delaying next activity)

Question 14

Total float

Answer 14

Found by taking the EST and duration from LFT

LFT - EST - duration

(Spare time available without delaying the whole project)

Question 15

Dummy activity

Answer 15

• Used to purely show dependencies
• Not labelled as they take up no time/ resources

Question 16

Benefits of using CPA

Answer 16

• Maximise efficiency in use of time
• Improve efficiency and generate cost saving in use of resources
• Beneficial to monitoring cash flow

Question 17

Drawbacks of using CPA

Answer 17

• Usefulness may be limited in complex & large scale operations
• Necessity of having clear & reliable information
• Skilled management and team philosophy is essential

Question 18

Advantages of simple payback

Answer 18

• Simple and easy to calculate & easy to understand the results
• Focuses on cash flow - good for use by business where cash is a source resource
• Emphasises speed of return; may be appropriate for businesses subject to significant market change
• Straightforward to compare competing projects

Question 19

Disadvantages of simple payback

Answer 19

• Ignores cash flows which arise after the payback has been reached - e.g. does not look at the overall project return
• Takes no account of the ‘time value of money’
• May encourage short-term thinking
• Ignores qualitative aspects of a decision
• Does not actually create a decision for investment

Question 20

Average rate of return (ARR)

Answer 20

Need to earn a satisfactory rate of return if they are to justify their allocation of source capital

Question 21

Advantages of ARR

Answer 21

• ARR provides a percentage return which can be compared with a target return
• ARR looks at the whole profitability of the project
• Focuses on profitability - a key issue for shareholders

Question 22

Disadvantages of ARR

Answer 22

• Does not take into account cash flows - only profits (they may not be the same thing)
• Takes no account of the time value of money
• Treats profits arising late in the project in the same way as those which might arise early

Question 23

What is simple payback

Answer 23

Payback period in capital budgeting refers to the period of time required to recoup the funds expended in an investment, or to reach break-even.

Question 24

Net present Value (NPV)

Answer 24

Calculates the monetary value now, of the project’s future cash flows

Question 25

How to calculate ARR

Answer 25

1) Add up all cash inflows from years 1-5
2) Minus original cost of the project
3) Divide this by the number of years the project runs for
4) Divide this by cost of the project

Question 26

How to calculate NPV

Answer 26

• Discount table used to make profit figure more realistic as money in the future is worth less than it is now
  1) Multiply each cash flow by the discount, this gives present value column
  2) NPV = present value total - initial cost

Question 27

Benefits of NPV

Answer 27

• Takes account of time value of money, placing emphasis on earlier cash flows
• Looks at all the cash flows involved through the life of the project
• Use of discounting reduces the impact of long-term , less likely cash flows
• Has a decision- making mechanism- rejects projects with negative NPV

Question 28

Drawbacks of NPV

Answer 28

• More complicated method - users may find it hard to understand
• Hard to select the most appropriate discount rate - may lead to good projects being rejected
• The NPV calculation is very sensitive to initial investment cost.