3.3 decision making techniques Flashcards
what does time series analysis help?
- helps a business workout whether there is an upwards trend, downwards trend or a constant trend in sales figures
what do businesses invest in?
- non-current assets
- launching new products
- new technology
- expansion
- infrastructure
what are financial methods for investment appraisal?
- payback period
- average rate of return (ARR)
- net present value
what is payback period?
- calculates the length of time it takes for an investment to recoup its original cost
what is average rate of return (ARR)?
- calculates the annual averages return over the life of an investment with other alternatives
what is net present value?
- can be used alongside other techniques and considers the future value of an investment
ARR=
average annual profit
———————————- X100
assets initial cost
Net present value=
net cash flow X discount factor
what are financial factors when making investment decisions?
- rate of investment
- ROCE
- cost
non financial factors when making investment decisions?
- corporate objectives
- ethics
- industrial relations
limitations of payback period?
- cash earned after payback is ignored
- profitability overlooked
limitations of ARR?
- effects of time on value of money ignored
limitations of NPV?
- calculation is more complex
- if rate of discount is too high, projects will not be profitable
what are decision trees?
- method of tracing alternative outcomes from a range of business decisions, options or projects
benefits of decision trees?
- clarifies possible courses of actions
- adds financial data to decisions
- make managers account for risk
drawbacks of decision trees?
- profitability is often estimated
- doesn’t consider qualitative information
- doesn’t take into account dynamic nature of a business
in a decision tree what do you do to the options your not taking?
- cross through them
what is critical path analysis?
- involves using a network diagram to manage the various tasks required to complete a project
benefits of critical path analysis?
- identify the activities involved in implementing a strategy
- effectively plan for the implementation of a strategy
- introduce informed deadlines for different activities
- allocate resources efficiently to the different activities
limitations of critical path analysis?
- can be difficult as projects involve multiple factors
- doesn’t take into account quantitative issues
- relies on estimations
how do you identify the critical path?
- by using hatched lines
