3.3 decision making techniques

Question 1

what does time series analysis help?

Answer 1

• helps a business workout whether there is an upwards trend, downwards trend or a constant trend in sales figures

Question 2

what do businesses invest in?

Answer 2

• non-current assets
• launching new products
• new technology
• expansion
• infrastructure

Question 3

what are financial methods for investment appraisal?

Answer 3

• payback period
• average rate of return (ARR)
• net present value

Question 4

what is payback period?

Answer 4

• calculates the length of time it takes for an investment to recoup its original cost

Question 5

what is average rate of return (ARR)?

Answer 5

• calculates the annual averages return over the life of an investment with other alternatives

Question 6

what is net present value?

Answer 6

• can be used alongside other techniques and considers the future value of an investment

Question 7

ARR=

Answer 7

average annual profit
———————————- X100
assets initial cost

Question 8

Net present value=

Answer 8

net cash flow X discount factor

Question 9

what are financial factors when making investment decisions?

Answer 9

• rate of investment
• ROCE
• cost

Question 10

non financial factors when making investment decisions?

Answer 10

• corporate objectives
• ethics
• industrial relations

Question 11

limitations of payback period?

Answer 11

• cash earned after payback is ignored

- profitability overlooked

Question 12

limitations of ARR?

Answer 12

• effects of time on value of money ignored

Question 13

limitations of NPV?

Answer 13

• calculation is more complex

- if rate of discount is too high, projects will not be profitable

Question 14

what are decision trees?

Answer 14

• method of tracing alternative outcomes from a range of business decisions, options or projects

Question 15

benefits of decision trees?

Answer 15

• clarifies possible courses of actions
• adds financial data to decisions
• make managers account for risk

Question 16

drawbacks of decision trees?

Answer 16

• profitability is often estimated
• doesn’t consider qualitative information
• doesn’t take into account dynamic nature of a business

Question 17

in a decision tree what do you do to the options your not taking?

Answer 17

• cross through them

Question 18

what is critical path analysis?

Answer 18

• involves using a network diagram to manage the various tasks required to complete a project

Question 19

benefits of critical path analysis?

Answer 19

• 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

Question 20

limitations of critical path analysis?

Answer 20

• can be difficult as projects involve multiple factors
• doesn’t take into account quantitative issues
• relies on estimations

Question 21

how do you identify the critical path?

Answer 21

• by using hatched lines