3.3 - Decision-making techniques

Question 1

Four quarter moving averages

Question 2

Simple payback

Answer 2

Find year in which cumalitive net cash flow covers innition investment
Then find how many months into the final year the innitial invesment is payed back

Question 3

Average rate of return (ARR)

Answer 3

Average annual return / initial investment x 100

I think dont include year 0 in number of years for calculation

Question 4

Net Present Value

Answer 4

Multiply net cash flow for each year by discount factor, to calculate present value.
Next, add all present values including for year 0 (innitial investment)
It suggests the investment if worthwhile if the NPV is positive

Question 5

Critical path analysis

Question 6

Decision Trees

Answer 6

• Expected value = (result of of outcome A x probability) + (result of outcome B x probability)
• Net gain = (expected value of outcome A + expected value of outcome B) - cost of decision
• Outcome A or B usually refers to sucess / failure
• Note that the expected value does not represent the revenues an option is expected to generate.