Decision Making Techniques 3.3

Question 1

What is a quantitative sales forecast?

Answer 1

Using past data as a way to create numerical future data in order to predict sales and business performance

Question 2

How to calculate a three year moving average.

Answer 2

The year u want to calculate a moving average for, add that year to the year before and the year after and then divide by 3 to give the 3 year moving average

Question 3

How do you find the 4 year moving average?

Answer 3

The year you want to calculate, add the 2 years prior and year year post to the year and then divide by 8 to give the 4 year moving average

Question 4

What is meant by the term extrapolation?

Answer 4

This involves using past data in order to make future predicitions

Question 5

How do you calculate variation?

Answer 5

Actual sales - trend

Question 6

What are some of he limitations of quantitative sales forecasts?

Answer 6

• Predicting data too far in the future may be unreasonable because trends can’t predict future trends.
• Dynamic markets are hard to predict
• If they are not revised frequently, may not be reliable

Question 7

What is casual modelling?

Answer 7

This has an aim to find the link between one variable and another. The data can later then be put into a scatter graph

Question 8

What is the definition of investment appraisal?

Answer 8

How a business evaluates whether an investment project is profitable. This is done by comparing the capital cost of the project with the next cash flow

Question 9

How does simple payback work?

Answer 9

How long it takes for a project to recover or go back to the initial outlay

Question 10

What are the 2 steps to finding the payback time?

Answer 10

1. Finding the cumulative net cash flow by calculating the net cash flow for each year and including the initial cost of the investment
2. Then add up the net cash flow until you reach the cost of initial investment. This shows how many years it takes

Question 11

How do you calculate the number of months it takes to reach the pay back time if necessary?

Answer 11

(Amount required/ net cash flow in that year) x 12

Question 12

What ae 3 advantages of a simple payback method?

Answer 12

• Simple to use
• Technology changes makes it a useful tool
• Firms may adopt this method if they have cash flow problems

Question 13

What is average rate of return?

Answer 13

This is measuring the average annual profit on an investment as a percentage of the initial capital cost

Question 14

Advantages of ARR?

Answer 14

• It can be compared with other business investments
• Can be compared with IR for example to see if the percentage is worth the investment

Question 15

Disadvantages of ARR?

Answer 15

• The value of money changes over time due to inflation
• If IR are relatively similar to the ARR then investment may not be worth it

Question 16

What is discounted cash flow?

Answer 16

This is when we have to add the interest rate onto one year and then add the same interest rate onto the new total each year

Question 17

What is NVP?

Answer 17

Calculates ARR but takes into account IR and time

Question 18

Advantages of NVP

Answer 18

Takes into account economic factors

Question 19

What is a decision tree?

Answer 19

Its the use of estimates and probabilities to predict likely outcomes

Question 20

How do you calculate probabilities in decision trees?

Answer 20

Multiply the cost by the probability
Then add the 2 probabilities together and minus the initial cost

Question 21

What is a critical path analysis?

Answer 21

When a business is creating a project, there has to be a technique in order to determine the most efficient way in order to complete each activity involved in a project

Question 22

What does critical path analysis calculate?

Answer 22

• The earliest and latest each activity can start and finish without making the project longer
• The longest path of planned activities to end the project

Question 23

What is float time?

Answer 23

This is when an activity can b delayed without making the project longer

Question 24

What are the 3 main advantages of critical path analysis?

Answer 24

• Improves efficiency because it gives the EST and LFT each activity on the project
• Aids resource planning as it tells us when certain resources are needed
• Forces managers to make detailed planning as the time frame must be met so that the project is completed on time

Question 25

What are the 3 main disadvantages of critical path analysis?

Answer 25

• The durations are estimates, some activities may take shorter period
• Quality of the activities may not be taken into account because managers may be rushing to get the activities and project done
• Creates a rigid structure so any delays could mean the project is put to a halt.