3.3 Decision Making Techniques Flashcards
What is the purpose of doing an average on a sales forecast?
The data becomes smooth and so you can see trends occurring.
What are the limitations of a quantitive sales forecast?
- Past performance is no guarantee of the future
- businesses need to appreciate swot and pestle factors
- weather
- trends
- competitor activity
- terrorist activity
- in high tech markets products may have a short PLC
- Time consuming
- averages don’t consider how recent the data is
What is payback?
Time taken for a project to repay final investment
What are the limitations of payback?
- Doesn’t consider profitability
- only accounts for time
- encourages short term thinking
- ignores cash flows after the payback is reached
- doesn’t account for value of money
- doesn’t create a decision for investment
What are the advantages of payback?
- Simple to calculate
- focuses on cash flow
- emphasis on speed of return
How do you calculate ARR?
- add up all inflows and minus all the outflows
- minus original investment
- divide by number of years it goes on for
- divide by original investment and X by 100
what is NPV?
it calculates the monetary value of a projects future cash flows
What is the present value calculation?
cash flow x discount factor
What is the net present value calculation?
add together the present values including investment
What are limitations of NPV?
- very complex
- not used by small businesses
- results are dependent on rate of discount
- higher rate means a higher chance of the project being rejected and unprofitable
What are the uses of decision trees?
- new product launch
- new marketing campaign
- relocating to a new premise
How do you calculate expected value?
probability of success/failure X expected loss/profit
what are limitations of decision trees?
- doesn’t account for unforeseen costs and circumstances such as a delay in shipping
- not useful when a business needs to act quickly
- degree of usefulness varies with the context of the business
- large degree of uncertainty about any decisions made by the tree
- prone to error
- ignores qualitative aspects of decisions
How do you calculate net gain?
minus the cost of investment from the expected value
What are benefits of decision trees?
- choices are set out in a logical way
- potential options and choices are considered at the same time
- use of probabilities enables the risk of options to be addressed
- costs are considered as well as benefits
- easy to understand and tangible results
