3.3

Question 1

investment

Answer 1

• purchase of capital goods
• expenditure by a business that is likely to yield a return in the future

Question 2

investment appraisal

Answer 2

• describes how a business might evaluate an investment project to determine if it is likely to be profitable
• allows businesses to compare investment projects
• involve the use of capital cost and net cashflow

Question 3

methods of investment appraisal

Answer 3

• payback period (time)
• average rate of return (%)
• discounted cash flow (£)

Question 4

payback period

Answer 4

time it takes for a project to repay its initial investment

Question 5

benefits of using payback period

Answer 5

• simple and easy to calculate
• focuses on cash flows
• emphasises speed of return
• straightforward to compare competing projects

Question 6

drawbacks of using payback period

Answer 6

• ignores cash flows after payback is reached
• takes no account of the ‘time value of money’
• may encourage short term thinking
• ignores qualitative aspects of a decision
• doesn’t create a decision for the investment

Question 7

average rate of return (ARR)

Answer 7

• annual percentage return on an investment project based on average returns earned by the project
• calculation (%) = net return per annum / capital outlay (cost) x 100

Question 8

benefits of using average rate of return (ARR)

Answer 8

• simple to understand
• easy to calculate
• focuses on overall profitability of an investment project
• easy to compare with other key target rates of return
• uses all the returns generated by a project

Question 9

drawbacks of using average rate of return (ARR)

Answer 9

• ignores the timing of returns
• focuses on profits instead of cashflows
• doesn’t adjust for the time-value of money

Question 10

critcial path analysis (CPA)

Answer 10

• improves the management of time and resources
• uses network diagrams
• helps a business organise its jobs and tasks, as well as planning, organising and resource management

Question 11

purpose of a critical path analysis

Answer 11

• efficiency
• decision making
• time based management
• working capital control

Question 12

network analysis

Answer 12

• helps a business manage projects effectively
• allows the business to find the sequence or path of tasks that are critical to the project

Question 13

features of a network

Answer 13

• arrows and lines = tasks/activities
• tasks can be carried out together
• arrows and lines cannot cross
• each tasks takes a certain amount of time
• tasks must be completed in a certain order
• circles (nodes) = show the start and finish of a task/activity, contain information about the timing of a project
• always a node at the tart and end of a project

Question 14

earliest start times (EST)

Answer 14

• top right of nodes
• calculated by moving left to right across the diagram
• adding up the numbers to find the largest

Question 15

latest finish times (LFT)

Answer 15

• bottom right of nodes
• calculated by moving across the diagram right to left
• subtracting the numbers to find the smallest

Question 16

critical path

Answer 16

• shows the tasks which, if delayed, will lead to a delay in the project
• route through the nodes should take the longest time
• shown with a line through the network

Question 17

the float

Answer 17

• amount of time by which a task can be delayed without causing the project to be delayed
• if the number is on the critical path, float equals 0

Question 18

limitations of critical path analysis

Answer 18

• information used to estimate times may be incorrect
• changes sometimes occur during the life of the project
• resources may be inflexible
• network analysis can become complex with hundreds of thousands of tasks to take into account

Question 19

why do businesses forecast sales

Answer 19

• vital planning activity
• forms the basis for other parts of business planning
• helps to focus market research

Question 20

extrapolation

Answer 20

uses trends established from historical data to forecast the future

Question 21

time series data

Answer 21

used to identify:
- trends
- seasonal fluctuations
- cyclical fluctuations
- random fluctuations

Question 22

moving avergage

Answer 22

• takes a data series and ‘smoothes’ the fluctuations in data to show an average
• aim is to take out extremes of data from period to period

Question 23

variation formula

Answer 23

actual sales - trend

Question 24

benefits of extrapolation

Answer 24

• simple method of forecasting
  – not much data required
• quick and cheap

Question 25

drawbacks of extrapolation

Answer 25

- unreliable if here are fluctuations - assumes past trends will continue - ignores qualitative factors

Question 26

sales forecasts will be more reliable if

Answer 26

- forecasted for a short period of time - revised frequently - market is slow to change - market research data is available - people preparing the data understand it