Decision Making Techniques Flashcards
What is investment appraisal?
A technique determining whether an investment is likely to be profitable
What is simple payback?
The simplest method of investment appraisal, it is the period of time required to recoup the funds
What are the benefits of payback?
-Simple and easy to calculate
-Focuses on cash flows
-Emphasis on speed of return
-Straight forward to compare
What are the drawbacks of payment?
-Ignores cash flows after payback has been reached
-Takes no account of the time value of money
-Encourages short term thinking
What is the average rate of return (ARR)?
Looking at the total accounting return for a project to see if it meets the target return
What are the benefits of ARR?
-Can be compared as it is a percentage
-Looks at the whole profitability of the project
-Focuses on profitability
What are the drawbacks of ARR?
-Doesn’t take inflation into account
-Doesn’t take cash flows into account, only profits
What is net present value (NPV)?
Calculates the monetary value now of the project’s future cash flows
What are the benefits of NPV?
-More complicated, harder to understand
-Difficult to select the most appropriate discount rate
-Calculation is very sensitive to the initial investment cost
What is time series?
A management tool to make predictions from past data
What are the limitations of time series?
-Relies on what happened in the past continuing to happen
-Doesn’t link with corporate objections
-Uses historical data
What is a decision tree?
-Method of trading the alternative outcomes of any decisions
-The likely results can then be compared so that the business can find the most profitable alternative
What are the advantages of decision trees?
-Useful for operational decision making
-Effective use of back data
-Shows flexibility
-Encourages clear thinking and planning
What are the disadvantages of decision trees?
-Reliant on accuracy
-Profitability’s are estimates
-Real time data problems
What is critical path analysis?
A project management technique that requires mapping out every key task that is necessary to complete a project
-will show how long each task will take and what order they should be carried out
