THEME 3 :SECTION 3 (DECISION MAKING )

Question 1

What is sales forecasting?

Answer 1

-Sales forecasting is when a business predicts future sales volume and revenue using past data and market research

Question 2

What is quantitative sales forecasting analysis and some methods of it?

Answer 2

Quantitative sales forecasting is how sales forecasting data is gathered. Methods include Time- series analysis, moving averages, scatter graph analysis and correlation

Question 3

What is time-series analysis?

Answer 3

Time-series analysis is a specific way of analysing a sequence of data points collected over time.

Question 4

What is cyclical variation and why is it used?

Answer 4

= the difference between actual figures and moving averages.

- Can be useful in creating more accurate sales forecasts

Question 5

What is extrapolation on graphs and how can it be used to forecast for the future?

Answer 5

Extrapolation is the extension of a graph, curve, or range of values by inferring unknown values from trends in the known data.

Question 6

DISADVANTAGES of quantitative sales forecasting?

Answer 6

• Data can change very quickly
• Correlation does not show cause and effect
• Extrapolation and moving averages can be harmful is wrong

Question 7

What is investment appraisal and the names of the main types?

Answer 7

• Investment appraisal is a type of analysis a business can do in order to see the best, easiest and quickest way to receive a return on investment
• Types: Payback period, Average Rate of Return, Net Present Value (sometimes ROCE can be used too )

Question 8

What is the payback period and what does it show a business?

Answer 8

• Payback period shows a business when they should expect to see their investment come back alone.

Question 9

The formula for Payback Period

Answer 9

If shown on table = amount to pay back / NCF for payback period x12
If cash flow is consistent = invested amount / annual cash flow

Question 10

What is the Annual (Average) Rate of Return and what does it show a business?

Answer 10

• ARR is a measure of the proportion the business will get back in terms of what they invested
• shows profitability as a percentage to make it easier to compare to others

Question 11

The formula for ARR?

Answer 11

ARR= average annual return / investment x100

average annual return = NCF / total years of the project

Question 12

What is Net Present Value and what does it show a business?

Answer 12

NPV shows the time value of money (how much the money will be worth when it is paid back )
-Considers when the money is received and not just how much is received, but how much that will be worth too

Question 13

Formula for NPV

Answer 13

sum of present values - cost of initial investment

Then: (net present value /investment)x100

Question 14

Limitations of using payback period?

Answer 14

• ignores the time value of money
• ignores cash flow after payback (doesn’t take into account that one projects, although It might payback faster it might also not make much future returns)

Question 15

Limitations of using ARR?

Answer 15

• ignores the time value of money

- ignores the timing of cash flow

Question 16

Limitation of NPV?

Answer 16

• discount factors are based on predictions of inflation and interest changes

Question 17

What is a decision tree used for?

Answer 17

A decision tree is used as a tool, that businesses use to make a decision based on probability

Question 18

What are the formulas needed when using decision trees?

Answer 18

• EMV = probability x the possible outcome (£)
  -Net gain = EMV - investment
  (done for each aspect of the tree ie yes/no)

Question 19

Limitation of decision tree

Answer 19

• Based on predictions and probability, could be bias or just completely wrong
• There are a wide range of potential outcomes

Question 20

What is critical path analysis?

Answer 20

Critical path analysis is a quantitative way of finding the most efficient way of doing a project.
Critical path = the sequence of stages determining minimum times needed to fulfil a task.

Question 21

Why is critical path analysis used?

Answer 21

• The sooner a project ends, the sooner investment and revenue is received
• Competitive advantage for putting the project out quick
• Identifies when tasks can be done simultaneously and what can be modified.

Question 22

What elements are worked out in critical path analysis and what are the formulas for doing so?

Answer 22

EST= Earliest Start Time, the earliest a task can start assuming the one before has finished (Adding the duration of the previous tasks)
EFT = Earliest Finishing Time, the earliest a project could finish if started on EST (Duration + EST)
LFT = Latest Finish Time, the latest a task can finish before having a knock-on effect ( working backwards from the predicted end of project and duration times being taken from them )
LST = Latest Start Time, the latest it can be started (Duration - LFT)
Float time = length of time you can delay an activity without delaying completion (only if there is more than one task at a time) (LFT-duration - EST)

Question 23

Limitations of critical path analysis

Answer 23

• time-consuming

- doesn’t account for uncertainties that could occur (tasks being postponed)