Decision-making techniques

Question 1

How do you calculate time-series analysis? (3 year)

Answer 1

3

Question 2

How do you calculate time-series analysis? (4 year)

Answer 2

yr 1 + yr 2 + yr 3 + yr 4 = x
yr 2 + yr 3 + yr 4 + yr 5 = y 
x + y = z
x
--   = 4 year moving average
8

Question 3

How might a business find the variation? (trend)

Answer 3

actual sales - trend

Question 4

How might a business calculate its cyclical variation?

Answer 4

6

Question 5

how might a business calculate its seasonal variation?

Answer 5

2

Question 6

What are the limitations of quantitive sales forecasting?

Answer 6

• even slow markets can change by a few % for no reason
• consumer trends are variable
• competitors actions are hard to predict

Question 7

What is simple payback period?

Answer 7

The amount of time it takes for a project to recover/pay back the initial outlay.

Question 8

What are the advantages of simple payback?

Answer 8

• Simple to use
• useful as technology is fast changing
• should help w cash flow problems

Question 9

What are the disadvantages of simple payback?

Answer 9

• ignores profitability of the project

- cash earned after isn’t taken into consideration.

Question 10

How do you calculate the simple payback period?

Answer 10

by adding the cumulative net cash flow

Question 11

What is average rate of return (ARR)?

Answer 11

The measure of net return each year as a % of the capital cost of the investment.

Question 12

How do you calculate ARR?

Answer 12

capital cost - net cash flow
————————————— = profit
years

profit
———- x 100
costs

Question 13

What are the advantages of ARR?

Answer 13

• rate of return can be compared to other uses for investment funds
• shows clearly the profitability of an investment project

Question 14

What are the disadvantages of ARR?

Answer 14

• Some allowance made for time span over which the income from an investment project is receive for it to be most useful
• doesn’t take into account time value of money

Question 15

What is net present value?

Answer 15

Takes into account the effects that interest rates have on investment decisions

Question 16

How do you calculate net present value?

Answer 16

present values - initial costs = NPV

Question 17

What are the advantages of net present value?

Answer 17

Correctly accounts for the value of future earnings by calculating present values

Question 18

what shape is a decision node on a decision tree?

Answer 18

Square

Question 19

what shape is a chance node on a decision tree?

Answer 19

circle

Question 20

How do you calculate the expected value?

Answer 20

outcome x profitability (for each outcome)

add together

Question 21

How do you calculate the net gain?

Answer 21

expected value - cost

Question 22

What are the advantages of using decision trees?

Answer 22

• shows options available
• encourages logical thinking
• takes risk into account
• highlights likely hood of each outcome
• quantifies outcome of each decision

Question 23

What are the disadvantages of using decision trees?

Answer 23

• relies heavily on estimates
• doesnt take into account qualitative factors
• estimates may be biased
• doesnt consider external factors

Question 24

What is critical path analysis?

Answer 24

The process of planning the sequence of activities in a project in order to discover the most efficient and quickest way of completing it.

Question 25

What is the float in a critical path analysis and how do you calculate it?

Answer 25

The time by which a task can be delayed without affecting the project. float = LFT of activity - EST of activity - duration

Question 26

What are the advantages of critical path analysis?

Answer 26

- Monitors progress - time frames - high efficiency with resources - plans each activity

Question 27

What are the disadvantages of critical path analysis?

Answer 27

- Activities too complex to represent accurately on a network - reliant on estimates - delay makes it inefficient