3.3 - making business decisions

Question 1

What is time series data

Answer 1

time series data is when sales figures are collected at consistent time intervals (e.g. every month)

Question 2

What is time series analysis used for

Answer 2

time series analysis is sued to reveal underlying patterns in the time series data

Question 3

What are cons of time series data

Answer 3

time series data can be difficult to interpret if the data has fluctuations.

Question 4

What is a three period moving average

Answer 4

a three period moving average calculates the average of periods 1,2 and 3, then periods 2,3 and 4 and so on.

Question 5

What is a four quarter moving average

Answer 5

The four quarter moving average takes the averages over the quarter of a year.

Question 6

What are scatter graphs and lines of best fit

Answer 6

Scatter graphs and lines of best fit show trends in data.

Question 7

How can you tell the correlation in a line of best fit

Answer 7

The closer the line of best fit is to the data points, the stronger the correlation is

Question 8

What is extrapolation

Answer 8

Extrapolation is when trends in past sales data is used to forecast future sales

Question 9

What are pros of extrapolation

Answer 9

exrapolation allows managers to forecast future sales and set sales targets. Sales performance can then be measured against these targets.

Question 10

What are the cons of extrapolation

Answer 10

Extrapolation relies on the assumption that past trends will remain true, however past performance is no guarantee of the future since a firms sales can be influenced by external factors.

Question 11

What is cyclical variation

Answer 11

The difference between the actual sales figure and the moving average for a period of time

Question 12

How do you calculate cyclical variation

Answer 12

Cyclical variation = actual sales figure - moving average

Question 13

What is the main reason why businesses invest

Answer 13

Businesses often invest in order to achieve their objectives e.g. if a firms objective is to increase sales then they may invest in new machinery to produce more

Question 14

Why are investments risky

Answer 14

Any situation where you have to spend money in the hope of making money in the future is risky, because there is the possibility that you do not make as much money as you expect

Question 15

What do firms do when making strategic decisions about investments

Answer 15

When firms are making strategic decisions about how to invest, they gather as much data as possible so that they can work out the risk and reward involved

Question 16

What are the 2 main questions firms ask when deciding whether an investment is good or not

Answer 16

1 - how long will it take to get the money back that they spent. 2 - how much profit will they get from the investment

Question 17

What are the 3 methods businesses can use to help decide whether an investment is a good idea

Answer 17

1- calculating the payback period. 2 - calculating the average rate of return. 3 - calculating discounted cash flows

Question 18

What is the payback period

Answer 18

The payback period is the time it takes for a project to make enough money to pay back the initial investment.

Question 19

How do you calculate the payback period

Answer 19

Payback period = amount invested / annual net cash flow

Question 20

What is the average rate of return

Answer 20

Average rate of return compares the net return with the level of investment. The net return is the income of the project minus the costs, including the investment

Question 21

How do you calculate ARR

Answer 21

ARR = average net return / investment x 100

Question 22

What is discounted cash flows

Answer 22

Discounted cash flow takes into account the time value of money. It adjusts the value of cash flows in the future to calculate their present value

Question 23

What is the net present value

Answer 23

The net present value is the sum of the present values of cash flows, minus the cost of the initial investment.

Question 24

What does a negative NPV mean

Answer 24

If a business ends up with a negative NPV, it means that the projects returns will not be good

Question 25

What does a positive NPV mean

Answer 25

A positive NPV shows that the return on both of the projects is more than 100%.

Question 26

What are decision trees

Answer 26

Decision trees combine proability and expected pay off, so a business can use the data to make better decisions

Question 27

What is the expected monetary value (EMV) of an outcome

Answer 27

the expected monetary value (EMV) of an outcome is the probability of the outcome occuring multiplied by the pay off the business can expect to get.

Question 28

What is net gain

Answer 28

Net gain is the financial gain after initial costs have been subtracted.

Question 29

In a decision tree what does the square represent

Answer 29

A square represents a decision node which is the decision to be made.

Question 30

In a decision tree what do the lines from a square represent

Answer 30

The lines coming from a square show the possible courses of action and the costs of each action.

Question 31

In a decision tree what does a circle represent

Answer 31

A circle represents a chance node which shows there are alternative outcomes for a course of action

Question 32

In a decision tree what do the decimals represent

Answer 32

The declimals on the lines are the probabilities of each outcome occuring

Question 33

In a decision tree what are the values in £s

Answer 33

The values in £s represent the pay–off for the business if that outcome happens.

Question 34

What are the advantages of decision trees?

Answer 34

• decision trees make managers work out the probability and potential pay-off for each outcome using real numerical values instead of saying vague statements such as ‘this will increase sales’
• decision trees are a good visual representation of the potential outcomes of a decision
• decision trees allow managers to compare options quantitatively and objectively
• decision trees are useful in familiar situations where the business has enough experience to make accurate estimates of probabilities and benefits.

Question 35

What are the disadvantages of decision trees?

Answer 35

• Decision trees are quantitative, so they don’t take into non numerical data such as employees opinions on decisions.
• probabilities are very hard to predict accurately so there can be a lot of uncertainty about the probabilities.
• The values on a decision tree can depend on the person who makes it, due to different peoples opinions and experience.
• there are a wider range of potential outcomes than a decision tree suggests.

Question 36

What is critical path analysis

Answer 36

Critical path analysis identifies the most efficient and cost–effective way of completing a complex project.

Question 37

What happens in a critical path analysis

Answer 37

1- the various activities which activities make up the project identified, and the order or sequence that these activities must be performed ain
2 - the duration of how long each activity will take is estimated
3 - these activities are then arranged as a network or graph showing the whole project
4 - the shortest time required to get from start to finish is then identified.

Question 38

What are the circles on the analysis

Answer 38

The circles on the network are called nodes and they show where one activity stops and another activity begins. Each node is split into 3 parts, the number on the left shows the number of the node, the number on the top right shows the earliest start time of next activity, and the number on the bottom right shows the latest finish time of previous activity.

Question 39

What is the earliest start time

Answer 39

EST = earliest start time (in number of days, weeks, months etc) since the start of the project. An activity cant start until the activity before it has been completed.
EST is worked out by adding the duration of the previous activity to its EST

Question 40

What is the earliest finishing time

Answer 40

EFT = earliest finishing time. Its the time that an activity will finish if its started at the earliest start time.
You can work out the EFT for an activity by adding its duration to its EST.

Question 41

What is the latest finishing time

Answer 41

LFT = latest finishing time. This is the latest time by which the activity can be completed without holdingup the completion of the project.
LFT is calculated by working backwards from the final node. The LFT of the final node is equal to the EST of the final node. To work out the LFT of the node before, you subtract the duration of the next activity from its LFT.

Question 42

What is the latest start time

Answer 42

LST = latest start time. Its the latest time an activity can be started and still be finished by its LFT.
To calculate LST, subtract the duration of the activity from its LFT.

Question 43

What is float time

Answer 43

Float time (total float) is the length of tiem you can delay an activity without delaying the completion of the project.
Total float = LFT - duration - EST