3.3 decision techniques

• sales forecasting


  the process of predicting future sales levels by volume or value
• quantitative sales forecasting


  based on data that can be historic or the result of quantitative research
• moving averages


  series of averages calculated from successive segments of a series of data
• scatter graphs


  plot the relationships between 2 variables to identify correlation
• correlation


  identifying the relationship between 2 variables
• extrapolation


  using past data to extend the identified trends into the future
• limitations of quantitative sales forecasting

  1. greater uncertainty in the future

  2. sales will be influences by external shocks that can't be predicted

  3. manipulated or bias

  4. inadequate market research
• investment appraisal


  comparison of the expected future cash flow of an investment with the initial outlay for the investment
• simple payback period


  how long it will take you to pay back the investment (years and months)
• limitations of payback


  - the longer the payback period, the greater the degree of risk and uncertainty

  - provides no insight into profitability

  - assumes that in the payback period cash-flow will be the same each month
• Average rate of return (ARR)

  calculates average profit as a percentage of the initial investment
• calculating ARR


  (average profit/initial investment) x 100
• Net Present Value (NPV)

  calculates total return on investment taking into account the time value of money
• calculating NPV


  Σ(net cash flow x discount factor)
• limitations of investment appraisal

  - relies on forecasts that may lack accuracy

  - qualitative factors are not considered

  - market can change which affects future cash flows
• decision trees


  quantitative method of tracing outcomes of a decision so that the most profitable decision can be identified
• strengths of decision trees

  1. clearly shows the options available

  2. encourages logical thinking

  3. takes risk into account

  4. highlights the likelihood of each outcome
• limitations of decision trees

  - time consuming to gather reliable data

  - only an estimation

  - should only be used to AID decision making
• critical path analysis


  project management tool that uses network analysis to plan complex and time-sensitive projects
• critical path


  the tasks involved in a project, which if delayed, could delay the whole project
• earliest start time (EST)


  how soon a task in a project can begin
• latest finishing time (LFT)

  the latest tie that a task in a project can finish, without delaying the whole project
• free float


  the time by which a task can be delayed without affecting the project finishing time
• decision node


  used where a decision has to be made
• chance node


  used where there are a number of possible outcomes
• network diagram


  a chart showing the order of tasks involved in completing a project
• limitations of critical path analysis


  - heavily relies on estimates

  - doesn't take into account qualitative factors

  - doesn't guarantee project success

  - estimates may be biased