(3.3) Decision-Making Techniques

Question 1

What are Decision Trees and their purpose?

Answer 1

A method of seeing possible outcomes from business decisions. Used to help determine the best options

Question 2

What are the + and - of Decision Tress?

Answer 2

+Clarifies possible courses of action
+Adds financial data to decisions

• Probabilities are often estimated
• Doesn’t consider qualitative information
• Doesn’t consider the dynamic nature of business

Question 3

What is extrapolation?

Answer 3

Uses historical data to predict ahead

Question 4

How to calculate a moving average?

Answer 4

Add the last ‘n’ number of months then divide it by ‘n’. To calculate the next period move across one and repeat.

Question 5

Why might a business want to calculate a seasonal variation when predicting future sales figures?

Answer 5

-To provide more accurate predictions

Question 6

What are the 4 main variables in time series data?

Answer 6

• Trends
• Seasonal fluctuations (Eg Xmas)
• Cyclical fluctuations (Eg repeating patterns)
• Random fluctuation

Question 7

What is time series data?

Answer 7

A tool used to help a business work out trends to predict the future

Question 8

What are the limitations of quantitative sales forecasting?

Answer 8

• Relatively short term
• Dependant on the quality of the market research
• Lacks external factors
• Less valuable in volatile markets
• Advanced computer software can be costly
• Must be revised frequently to take account of new data and external factors

Question 9

What is investment appraisal?

Answer 9

A series of techniques designed to assist businesses in judging the best place to invest

Question 10

What are the 3 financial methods for investment appraisal?

Answer 10

• Payback: The time taken to recoup the initial investment and consider the cash inflows over a number of years.
• Average rate of return: Measures the profit achieved on an investment over time
• Net present value: Measures the future value of money by discounting cash inflows

Question 11

What are the + and - of using Extrapolation?

Answer 11

+A simple method of forecasting
+Not much data required
+Quick and cheap

• Unreliable if there are significant fluctuation in historical data
• Assumes past trends will continue into the future (which is unlikely)
• Ignores qualitative factors (e.g changes in tastes)

Question 12

What is payback period?

Answer 12

The time it takes for a project to repay its initial investment

Question 13

What are + and - of Payback period?

Answer 13

+Simple and easy to calculate & easy to understand the results
+Focuses on cash flows ( good for businesses where cash is scarce)
+Easy to compare with other projects

• Doesn’t look at the overall project return
• May encourage short term thinking
• Ignores qualitative aspects
• Doesn’t actually create a decision for the business

Question 14

What is Average (Accounting) Rate of Return and the formula?

Answer 14

A methods that measures the net return each year as a percentage of the capital cost of the investment

ARR(%) = ( Net Return (Profit) pa / Capital Outlay (Cost) ) * 100

Question 15

What is Investment Appraisal and the 3 methods?

Answer 15

A series of techniques designed to assist businesses in judging the desirability of investing in particular projects

• Payback period
• Average Rate of Return
• Discounted Cash Flow

Question 16

What are the + and - of using the ARR method?

Answer 16

+Shows clearly the profitability of an investment
+Easy to compare
+Easier to identify opportunity cost of investments

-Ignores the effects of time on the value of money

Question 17

What is discounted Cash Flow (Net Present Value)?

Answer 17

Understanding what profit/ cash inflows in the the future is worth at its present value.

Question 18

What are the + and - of the Discounted Cash-Flow method?

Answer 18

+Considers the value of money over time
+

• Complex to calculate
• If the rate of discount is high, it may seem that no project will ever be profitable

Question 19

What is float time?

Answer 19

The time you have available to complete a task while another is taking place

Question 20

Why is Critical Path Analysis important?

Answer 20

Efficiency - it shows the tasks that can take place concurrently and highlights those which are crucial to prevent an overall delay

Ensures deadlines are met to save costs and protect reputation. Penalty clauses are often written into contracts for projects. Bonuses can be awarded for meeting/beating deadlines.

It sets targets and minimises time spent on each task. Experience will help a business calculate the time needed for each task.

Working capital control - identifying when resources will be needed so capital isn’t tied up in raw materials and equipment eg hiring a digger or buying bricks. JIT.

Question 21

What are the limitations of using critical path analysis?

Answer 21

• Difficult to estimate the completion of an activity

- Can be difficult when it comes to bigger projects