3.3 - Decision-making techniques

Question 1

Four quarter moving averages

Answer 1

Find 4 quarter total of first 4, miss first year then find total of next 4. Add totals and divide by 8. Be careful of how numbers are arranged in the table.
If 4 quarter moving average is higher than actual sales then variation is negative

Question 2

Simple payback

Answer 2

Find year in which cumulative net cash flow covers initial investment
Then find how many months into the final year the initial investment is payed back

Question 3

Average rate of return (ARR)

Answer 3

Average annual return / initial investment x 100

I think dont include year 0 in number of years for calculation

Question 4

Net Present Value

Answer 4

Multiply net cash flow for each year by discount factor, to calculate present value.
Next, add all present values including for year 0 (initial investment)
It suggests the investment if worthwhile if the NPV is positive
Accounts for the effects of interest rates and time on the future value of money, but not inflation

Question 5

Limitations and benifits of Critical path analysis

Answer 5

Advantages of CPA
* Most importantly – helps reduce the risk and costs of complex projects
* Help spot which activities have some slack (“float”) and could therefore transfer some resources = better allocation of resources
* Provides managers with a useful overview of a complex project
* Helps to predict project duration - set appropriate budgets, inform cash flow forecasts

Disadvantages of CPA
* Reliability of CPA largely based on accurate estimates and assumptions made
* CPA does not guarantee the success of a project – that still needs to be managed properly
* Resources may not actually be as flexible as management hope when they come to address the network float
* Too many activities make the network diagram too complicated. Activities might themselves have to be broken down into mini-projects

Question 6

Decision Trees

Answer 6

• Expected value = (result of of outcome A x probability) + (result of outcome B x probability)
• Net gain = (expected value of outcome A + expected value of outcome B) - cost of decision
• Outcome A or B usually refers to sucess / failure
• Note that the expected value does not represent the revenues an option is expected to generate.

Question 7

Explain CPA

Answer 7

• EST - first node 0, calculated left to right, add duration of longest task duration from previous node(s). In upper segment of node
• LFT - calculated from right to left, last node LFT = last nodes EST. Subtract highest duration of activity from LFT. LFT in lower segment of node
• Float time - LFT of previous node - activity duration in middle - EST of preceeding
• Tasks with no float time are on critical path