3.3 Decision Making Techniques

Question 1

What is the purpose of doing an average on a sales forecast?

Answer 1

The data becomes smooth and so you can see trends occurring.

Question 2

What are the limitations of a quantitive sales forecast?

Answer 2

• Past performance is no guarantee of the future
• businesses need to appreciate swot and pestle factors
• weather
• trends
• competitor activity
• terrorist activity
• in high tech markets products may have a short PLC
• Time consuming
• averages don’t consider how recent the data is

Question 3

What is payback?

Answer 3

Time taken for a project to repay final investment

Question 4

What are the limitations of payback?

Answer 4

• Doesn’t consider profitability; inflation; effects of investment may have a unequal cash flow over time
• only accounts for time
• encourages short term thinking
• ignores cash flows after the payback is reached
• doesn’t account for value of money
• doesn’t create a decision for investment

Question 5

What are the advantages of payback?

Answer 5

• Simple to calculate
• focuses on cash flow
• emphasis on speed of return
• useful in a market where new technology is introduced frequently: can calculate whether on investment pays back before an upgrade is available

Question 6

How do you calculate ARR?

Answer 6

• add up all inflows and minus all the outflows
• minus original investment
• divide by number of years it goes on for
• divide by original investment and X by 100

Question 7

what is NPV?

Answer 7

it calculates the monetary value of a projects future cash flows

Question 8

What is the present value calculation?

Answer 8

cash flow x discount factor

Question 9

What is the net present value calculation?

Answer 9

add together the present values including investment

Question 10

What are limitations of NPV?

Answer 10

• very complex
• not used by small businesses
• results are dependent on rate of discount
• higher rate means a higher chance of the project being rejected and unprofitable
• only considers financial costs of a project

Question 11

What are the uses of decision trees?

Answer 11

• new product launch
• new marketing campaign
• relocating to a new premise

Question 12

How do you calculate expected value?

Answer 12

probability of success/failure X expected loss/profit

Question 13

what are limitations of decision trees?

Answer 13

• doesn’t account for unforeseen costs and circumstances such as a delay in shipping
• not useful when a business needs to act quickly
• degree of usefulness varies with the context of the business
• large degree of uncertainty about any decisions made by the tree
• prone to error
• ignores qualitative aspects of decisions

Question 14

How do you calculate net gain?

Answer 14

minus the cost of investment from the expected value

Question 15

What are benefits of decision trees?

Answer 15

• choices are set out in a logical way
• potential options and choices are considered at the same time
• use of probabilities enables the risk of options to be addressed
• costs are considered as well as benefits
• easy to understand and tangible results

Question 16

What is critical path analysis?

Answer 16

Management tool which helps a business identify how long a project will take and what the critical tasks in the project are

Question 17

What are the uses of CPA?

Answer 17

• Launching new products
• renovations of buildings
• advertising campaign
• installation of new tech in a business

Question 18

How do you calculate EST?

Answer 18

Previous EST + duration of task

Question 19

How do you calculate float?

Answer 19

LFT - activity duration

Question 20

How do you calculate LFT?

Answer 20

Start right to left and remove the largest value to gain the smallest figure

Question 21

What is float?

Answer 21

Duration of the activity can be extended or delays so that the project can finish in the minimum time

Question 22

Advantages of CPA?

Answer 22

• he,ps reduce risk and costs of complex projects
• encourages careful assessment of the requirements of each activity in a project
• help spot which activities have some float = better allocation of resources
• decision making tool and planning tool
• provided manager with a useful overview of a complex project
• links well with other aspects of business planning

Question 23

Disadvantages of CPA?

Answer 23

• reliability is based on accurate estimates and assumptions
• CPA doesn’t guarantee success
• resources may not be very flexible
• too many activities may make it too complocated

Question 24

What are the advantages of ARR?

Answer 24

• Considers all net cash flows generated by an investment
• percentages are easily comparable

Question 25

What are the disadvantages of ARR?

Answer 25

- Depends on average cash flow so it ignores timing of those cash flows - opportunity cost of investment is ignored as values are neither in real terms or adjusted to interest rates

Question 26

What are the advantages of NPV?

Answer 26

- Considers the opportunity cost of money - can create a range of scenarios by using different discount factors to adjust the level of risk involved

Question 27

Limitations of investment appraisal in general?

Answer 27

- Relies on forecasted future cast flows which may lack accuracy: - unexpected increases in costs - arrival of new competitors - charges in consumer tastes - doesn't account for factors other than the cost of investment: - doesn't book at overall corporate objectives - potential for positive PR or meeting their CSR is disregarded