Exam 3 - Chapter 9 - Prescriptive Analytics

Question 1

Define prescriptive analytics:

Why is prescriptive analytics performed after descriptive?

Answer 1

Analytics that examines a variety of scenarios to make specific recommendations based on what is expected to happen

• Parameters and limitations must be known prior to identifying possible options

Question 2

What are the 5 examples of prescriptive analytics?

Answer 2

1. Sensitivity analysis
2. Evaluating future cash flows
3. Marginal analysis
4. Goal seek analysis
5. What-if scenario analysis

Question 3

What is the use of sensitivity analysis for prescriptive analytics

Answer 3

Sensitivity analysis

Evaluation of the effect on outcomes based on impact of inputs

• Help analysts understand how sensitive the outcome is based on certain inputs

Question 4

Two techniques for evaluating cash flows when net income/profit from investments is known:

Answer 4

1. Accounting rate of return (ARR): % rate of return expected on an asset; profit divided by cost
2. Payback period: Length of time to earn back initial investment

Question 5

What must be known to evaluate the time value of money for evaluating cash flows?

Answer 5

1. Amount: How much is paid out/received
2. Timing: When are amounts paid/received
3. Uncertainty: Risk of actual cash flow; represented by interest rate

Question 6

How is Net Present Value calculated?

Answer 6

Calculated as present value of cash inflows less present value of outflows:

Present value = CF_t / (1 + r) ^t

• CF_t: Cash flows for period
• r: discount rate or interest rate

Question 7

What is Internal Rate of Return?

Answer 7

Internal rate of return

Discount rate that makes projects NPV = 0

Question 8

What is Capital budgeting of prescriptive analytics?

Answer 8

• Method to evaluate future cash flows
• Evaluating potential different investement to help identify which company should choose

Question 9

Net present value and internal rate of return can be used to help in these decisions:

Answer 9

Capital budgeting; which investments yield the greatest return

Lump sum or annuity: evaluate future cash flows of amounts to compare value to lump sum

Question 10

What is marginal (incremental) analysis?

Answer 10

Marginal analysis

Examines benefit (profit) from one more unit and compares to cost of one more unit

• ignores sunk cost; past spending that cannot be recovered

Question 11

What are some decisions that marginal analysis can help solve?

Answer 11

Company decisions

whether to add additional employee

Manufacturer decision

• whether to sell additional units at reduced price
• Should operations be expanded to add new product

Personal decision

• Whether to work additional hours or vacation
• Whether to go back to school

Question 12

What is what-if analysis?

What goal seek functions are used for prescriptive analytics?

Answer 12

What-if analysis

Process of changing values of input cells to examine effect on output

Functions include:

• Goal seek analysis
• Scenario analysis

Question 13

What is goal seek analysis?

Answer 13

Form of what-if analysis that tells what input will be needed in order to reach desired outcome/ouput

• Calculates backwards: start with desired output to understand inputs needed

Question 14

List some example of goal seek analysis:

Answer 14

• Max loan you can afford given certain monthly payment
• minimum sales needed to breakeven
• Minimum employees needed for audit
• Minimum hours to pass CPA exam

Question 15

What is what-if scenario analysis?

Answer 15

what-if scenario analysis

Process of analyzing future events by considering potential, multiple outcomes

Question 16

Give an example of scenario analysis:

Answer 16

Effect on net income considering multiple possible changes to tax rate

Question 17

What is make-or-buy analysis?

Answer 17

Technique used to analyze whether to manufacture product in house or purchase it

Question 18

What are some considerations made during make-or-buy analysis?

Answer 18

• Variable cost per unit compared to price from outsourcer
• Can fixed costs be removed by outsourcing
• Can outsourcing free capacity to take on other projects
• Should multiple partners be used as outsourcers