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business- year 2 > 3.3 decision making techniques > Flashcards

3.3 decision making techniques Flashcards

1
Q

What is the sales forecast ?

A

An important business planning tool that provides an estimation using past data and external factors

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2
Q

What are the three main methods in quantitative sales forecasting ?

A
  1. Moving averages
  2. Extrapolation
  3. Correlation
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3
Q

What is a moving average ?

A

A series of averages calculated from successive segments of a series of data to smooth fluctuations

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4
Q

What is extrapolation?

A

This is the prediction of future sales from past data done by extending the line of best fit

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5
Q

What is a correlation ?

A

When there is a link between two variables there is a correlation that may be positive or negative

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6
Q

How do you calculate moving averages ?

A

Add together sales for a specified number of periods

Divide the moving total by specified number of periods

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7
Q

What is a scattergraph ?

A

Allow businesses to compare two variables such as sales volume and advertising to see if there is any correlation

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8
Q

What are the types of correlation

A

Positive - as one increases so does the other

Negative - as one increases the other decrease

None - no connection

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9
Q

What are limitations of quantitative sales forecasting

A

Seasonality
Competition
Publicity
Market changes
Changes to legislation

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10
Q

How can you improve accuracy of sales forecasts?

A

Detailed market research

Employing experts with excellent market knowledge

Revising the sales forecasts frequently

Forecasting the short to medium term

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11
Q

What is investment appraisal?

A

Comparing expected future cash flows of an investment with initial outlay for that investment

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12
Q

What do they want to find out from the investment appraisal ?

A

How soon the investment will recoup initial outlay

How profitable the investment will be

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13
Q

What data needs to be collected for an investment appraisal ?

A

Sales forecasts
Fixed and variable costs
Pricing information
Borrowing costs

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14
Q

What methods are used to appraise value of an investment ?

A

The simple payback period
The ARR
The net present value of discounted cash flow

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15
Q

What is the simple payback period ?

A

The calculation of the amount of time it is expected an investment will take to pay for itself

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16
Q

How do you calculate payback period ?

A

Initial outlay / net cash flow per period = years/months

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17
Q

What is the benefit of payback period ?

A
  • Simple
  • Cash flow management
  • Identify the point where it is paid back
18
Q

What is the drawback of the payback ?

A
  • No insight into profitability of investment
  • Only considers total length of time to recover an investment
  • Neither timing or future value is considered
  • May encourage shortism approach
19
Q

What is the average rate of return ?

A

Compares average profit per year generated by an investment with value of initial outlay

20
Q

How do you calculate ARR ?

A

arr / initial outlay x 100

21
Q

Creative Frames, a small artwork framing business, is considering an investment of £40,000 in new machinery. Megan, the business owner, believes that total cash inflows over a 6-year period will be £140,000 and total cash outflows will be £92,000.

Calculate the Average Rate of Return of the proposed investment. (4 marks)

A

140 000 (cash inflows) - 92000 (cash outflows) = 48000 total profit
48000 / 6 years = 8000
8000 /40000 =0.2
20%

22
Q

What is the advantage of ARR

A
  • considers all net cash flows
  • easy to understand and compare
23
Q

what is the disadvantages of arr

A
  • ignores timing of cash flows
  • The opportunity cost of the investment is ignored as values are nether expressed in real terms nor adjustments made for the impact of interest rates and time
24
Q

What is net present value ?

A

A financial metric used to evaluate the value of an investment or a project

25
Q

What does the NPV take into account ?

A

Effects of interest rates
Effects of time

26
Q

What does the discounting method take into account ?

A
  • The fact that that money received in the future is worth less than money received today due to inflation
  • The opportunity cost of not having the money available for other uses
27
Q

How do you work npv ?

A

Total discounted - initial investment

28
Q

What are the advantages of NPV

A
  • considers opportunity cost of money
  • calculate forecast future values of net cash flow
  • they can adjust discount to adjust to level of risk
29
Q

What are the disadvantages of NPV

A
  • complicated
  • hard to accurately forecast
  • hard to select an appropriate discount
  • only looks at financial costs and not non financial eg environmental damage
30
Q

What overall is the limitations of I.A.T ?

A
  • relies on forecast
  • external shocks
  • does not consider objectives
31
Q

What is a decision tree ?

A

A quantitative method of tracing the outcomes of a decision so the most profitable decision can be identified

32
Q

What are the advantages of decision trees ?

A
  • Reveal unconsidered options
  • Consider risks
  • Requires deep research
33
Q

In a decision tree how do you calculate the expected monetary value ?

A

(Expected value of success x Probability) + (Expected value of failure x Probability)

34
Q

What is a limitation of using decision trees ?

A
  • Time and data
  • Constructed on estimates
  • Does not take into account qualitative elements
  • Time lag between making and implementing decision will effect relaiability
35
Q

What is a critical path analysis ?

A

project management tool that uses network analysis to plan complex and time-sensitive projects

36
Q

What components are in a C.P.A ?

A

Activites
Duration
Dependent on each activity

37
Q

What are some things the CPA shows ?

A
  • The order in which activities must be completed
  • Path of projects
  • The earliest and latest that each project activity can start and finish without delaying completion of the project as a whole
  • Activities within a project that can be carried out simultaneously are identified
  • The critical project activities which if delayed will cause the project as a whole to over-run
38
Q

What is the main drawings of a cpa ?

A

Node
- left half : activity number
- top right : EST
- bottom right : LFT

Activity
- line which link nodes

Duration
- below activity line

39
Q

If the nodes are equal for est and lft what does that mean ?

A

Where if the critical activites are delayed the whole project will be

40
Q

What is the float time ?

A

Float time exists where there is a difference between the Earliest Start Time (EST) and the Latest Finish Time (LFT)

41
Q

What are the limitations of C.P.A ?

A

Very lengthy
Relies on estimates and forecasts
Not guaranetee success of project

business- year 2 (11 decks)

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