THEME 3 :SECTION 3 (DECISION MAKING ) Flashcards

1
Q

What is sales forecasting?

A

-Sales forecasting is when a business predicts future sales volume and revenue using past data and market research

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2
Q

What is quantitative sales forecasting analysis and some methods of it?

A

Quantitative sales forecasting is how sales forecasting data is gathered. Methods include Time- series analysis, moving averages, scatter graph analysis and correlation

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3
Q

What is time-series analysis?

A

Time-series analysis is a specific way of analysing a sequence of data points collected over time.

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4
Q

What is cyclical variation and why is it used?

A

= the difference between actual figures and moving averages.

- Can be useful in creating more accurate sales forecasts

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5
Q

What is extrapolation on graphs and how can it be used to forecast for the future?

A

Extrapolation is the extension of a graph, curve, or range of values by inferring unknown values from trends in the known data.

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6
Q

DISADVANTAGES of quantitative sales forecasting?

A
  • Data can change very quickly
  • Correlation does not show cause and effect
  • Extrapolation and moving averages can be harmful is wrong
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7
Q

What is investment appraisal and the names of the main types?

A
  • Investment appraisal is a type of analysis a business can do in order to see the best, easiest and quickest way to receive a return on investment
  • Types: Payback period, Average Rate of Return, Net Present Value (sometimes ROCE can be used too )
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8
Q

What is the payback period and what does it show a business?

A
  • Payback period shows a business when they should expect to see their investment come back alone.
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9
Q

The formula for Payback Period

A

If shown on table = amount to pay back / NCF for payback period x12
If cash flow is consistent = invested amount / annual cash flow

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10
Q

What is the Annual (Average) Rate of Return and what does it show a business?

A
  • ARR is a measure of the proportion the business will get back in terms of what they invested
  • shows profitability as a percentage to make it easier to compare to others
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11
Q

The formula for ARR?

A

ARR= average annual return / investment x100

average annual return = NCF / total years of the project

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12
Q

What is Net Present Value and what does it show a business?

A

NPV shows the time value of money (how much the money will be worth when it is paid back )
-Considers when the money is received and not just how much is received, but how much that will be worth too

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13
Q

Formula for NPV

A

sum of present values - cost of initial investment

Then: (net present value /investment)x100

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14
Q

Limitations of using payback period?

A
  • ignores the time value of money
  • ignores cash flow after payback (doesn’t take into account that one projects, although It might payback faster it might also not make much future returns)
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15
Q

Limitations of using ARR?

A
  • ignores the time value of money

- ignores the timing of cash flow

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16
Q

Limitation of NPV?

A
  • discount factors are based on predictions of inflation and interest changes
17
Q

What is a decision tree used for?

A

A decision tree is used as a tool, that businesses use to make a decision based on probability

18
Q

What are the formulas needed when using decision trees?

A
  • EMV = probability x the possible outcome (£)
    -Net gain = EMV - investment
    (done for each aspect of the tree ie yes/no)
19
Q

Limitation of decision tree

A
  • Based on predictions and probability, could be bias or just completely wrong
  • There are a wide range of potential outcomes
20
Q

What is critical path analysis?

A

Critical path analysis is a quantitative way of finding the most efficient way of doing a project.
Critical path = the sequence of stages determining minimum times needed to fulfil a task.

21
Q

Why is critical path analysis used?

A
  • The sooner a project ends, the sooner investment and revenue is received
  • Competitive advantage for putting the project out quick
  • Identifies when tasks can be done simultaneously and what can be modified.
22
Q

What elements are worked out in critical path analysis and what are the formulas for doing so?

A

EST= Earliest Start Time, the earliest a task can start assuming the one before has finished (Adding the duration of the previous tasks)
EFT = Earliest Finishing Time, the earliest a project could finish if started on EST (Duration + EST)
LFT = Latest Finish Time, the latest a task can finish before having a knock-on effect ( working backwards from the predicted end of project and duration times being taken from them )
LST = Latest Start Time, the latest it can be started (Duration - LFT)
Float time = length of time you can delay an activity without delaying completion (only if there is more than one task at a time) (LFT-duration - EST)

23
Q

Limitations of critical path analysis

A
  • time-consuming

- doesn’t account for uncertainties that could occur (tasks being postponed)