Exam 3 - Chapter 9 - Prescriptive Analytics Flashcards
Define prescriptive analytics:
Why is prescriptive analytics performed after descriptive?
Analytics that examines a variety of scenarios to make specific recommendations based on what is expected to happen
- Parameters and limitations must be known prior to identifying possible options
What are the 5 examples of prescriptive analytics?
- Sensitivity analysis
- Evaluating future cash flows
- Marginal analysis
- Goal seek analysis
- What-if scenario analysis
What is the use of sensitivity analysis for prescriptive analytics
Sensitivity analysis
Evaluation of the effect on outcomes based on impact of inputs
- Help analysts understand how sensitive the outcome is based on certain inputs
Two techniques for evaluating cash flows when net income/profit from investments is known:
- Accounting rate of return (ARR): % rate of return expected on an asset; profit divided by cost
- Payback period: Length of time to earn back initial investment
What must be known to evaluate the time value of money for evaluating cash flows?
- Amount: How much is paid out/received
- Timing: When are amounts paid/received
- Uncertainty: Risk of actual cash flow; represented by interest rate
How is Net Present Value calculated?
Calculated as present value of cash inflows less present value of outflows:
Present value = CFt / (1 + r) t
- CFt: Cash flows for period
- r: discount rate or interest rate
What is Internal Rate of Return?
Internal rate of return
Discount rate that makes projects NPV = 0
What is Capital budgeting of prescriptive analytics?
- Method to evaluate future cash flows
- Evaluating potential different investement to help identify which company should choose
Net present value and internal rate of return can be used to help in these decisions:
Capital budgeting; which investments yield the greatest return
Lump sum or annuity: evaluate future cash flows of amounts to compare value to lump sum
What is marginal (incremental) analysis?
Marginal analysis
Examines benefit (profit) from one more unit and compares to cost of one more unit
- ignores sunk cost; past spending that cannot be recovered
What are some decisions that marginal analysis can help solve?
Company decisions
whether to add additional employee
Manufacturer decision
- whether to sell additional units at reduced price
- Should operations be expanded to add new product
Personal decision
- Whether to work additional hours or vacation
- Whether to go back to school
What is what-if analysis?
What goal seek functions are used for prescriptive analytics?
What-if analysis
Process of changing values of input cells to examine effect on output
Functions include:
- Goal seek analysis
- Scenario analysis
What is goal seek analysis?
Form of what-if analysis that tells what input will be needed in order to reach desired outcome/ouput
- Calculates backwards: start with desired output to understand inputs needed
List some example of goal seek analysis:
- Max loan you can afford given certain monthly payment
- minimum sales needed to breakeven
- Minimum employees needed for audit
- Minimum hours to pass CPA exam
What is what-if scenario analysis?
what-if scenario analysis
Process of analyzing future events by considering potential, multiple outcomes
