3.3 - Decision Making Techniques Flashcards
1
Q
What is meant by extrapolation?
A
- The simplest way to predict future sales by assuming they will be just like the past.
- the sales for each month are added to a graph and the line is simply extended to predict future sales
2
Q
What are the benefits of extrapolation?
A
- simple method of forecasting
- quick and cheap
- not much data required
3
Q
What are the drawbacks of extrapolation?
A
- unreliable - if there are significant fluctuations in historical data
- assumes past trends will continue into the future - unlikely in many competitive business environments
- ignores qualitative factors e.g. changes in tastes
4
Q
What is correlation?
A
similar to extrapolation but requires the use of a scatter graph in which a line of best fit
5
Q
What are the benefits of correlation
A
- numerical so easy to interpret and easy to analyse for example graphs can be made
- data can be objectively interpreted and bias is often not an issue
6
Q
What are the drawbacks of correlation?
A
- may lack detail
- correlation do not show cause and affect so may be hard to determine this
7
Q
What is a loose correlation?
A
- in some cases the relationship between two variables will be negative or loosely linked.
- if this is the case, firms may wish to stop investing in ineffective projects in the hopes of boosting sales.
8
Q
What is NPV?
A
- NPV method uses an important concept in investment appraisal - discounted cash flows
- recognises there in a change in value of money overtime
9
Q
What is payback period?
A
The amount of time it takes to cover the costs of an investment
10
Q
What is the formula for payback period?
A
Amount needed / net cash flow in year
NOTE:
- x12 answer in months
- x52 answer in weeks
11
Q
What is ARR?
A
How much the business will make back off an investment
12
Q
What is the formula for ARR?
A
ARR = average net profit per annum / initial investment (x 100)
