Business 3.3

What is time series ananlysis?
A method that allows a business to predict future levels from past figures
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What is investment?
The purchase of capital goods
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What is an investment appraisal?
The evaluation of an investment project to determine whether or not it is likely to be worthwhile.
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What is average rate of return?
It measures the net return per annum as a percentage of the initial spending.
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What is net present value?
The present value of future income from an investment project, minus the cost
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What is payback period?
The amount of time it takes to recover the cost of an investment project
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Give 3 advantages of the payback method?
1. Useful when technology changes rapidly. 2. Simple to use. 3. Firms might adopt this method if they have cash flow problems
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Give 2 limitations of the payback method?
1. Cash earned after the payback period is ignored. 2. The profitability of the method is overlooked
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Give an advantage of the average rate of return method?
1. It shows clearly the profitability of an investment project. Not only does it allow a range of projects to be compared, the overall rate of return can be compared to other uses for investment funds.
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Give a limitation of the average rate of return method?
The effects of time on the value of money are ignored.
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Give 2 advantages of the net present value method?
1. Correctly accounts for the value of future earnings by calculating present values. 2. It can be changed as risk and conditions in financial markets change.
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Give 2 limitations of the net present value method?
1. The calculation is more complex than the other methods. 2. The rate of discount ic critical- if it is high, fewer projects will be profitable.
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Give 5 non financial considerations which should be taken into account when appraising investment opportunities?
Human relations, ethical considerations, risk, availability of funds, business confidence
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What are decision trees?
A technique which shows all possible outcomes of a decision.
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What is meant by a quantitative approach to decision making?
A quantitative approach is where information onnwhich decisions are based, and the outcomes of decisions, are expressed as numbers
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In decsion trees, what are chance nodes?
The points where there are different possible outcomes in a decision tree. They are represented by circles.
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What are the advantages of decision trees?
- Constructing the tree diagram may show possible courses of action not previously considered. - They involve placing numerical values on decisions. This tends to improve results. - They force management to take account of the risks involved.
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What are the limitations of decision trees?
- Much of it is based on probabilities which are often estimated. - Can be influenced by peoples opinions. - Time lags often occur in decision making. - Can be quite time consuming. - Data could be manipulated.
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State three possible situations where a business might make use of a decision tree?
Can help to determine which course of action to take when deciding upon a price change, or which marketing strategy to select, or types of finance to use.
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What is a critical path?
The tasks involved in a project which, if delayed, could delay the project
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What is critical path analysis?
A method of calculating the minimum time required to complete a project, identifying delays which could be critical to its completion
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What is free float?
The time by which a task can be delayed without affecting the following task.
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What is total float?
The time by which a task can be delayed without affecting the project.
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What is a node? (critical path analysis)
Positions in a network diagram which indicate the start and finish times of a task.
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How do you calculate the total float?
LFT of activity- EST of activity- duration
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How do you calculate the free float?
EST start of next task- EST start of this task- duration
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What are the limitations of critical path analysis?
- Information used to estimate times in the network may be incorrect. - Changes sometimes occur during the life of the project. - With large projects network analysis can become complex with thousands of tasks to take into account.
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Card 2

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What is investment?

Back

The purchase of capital goods

Card 3

Front

What is an investment appraisal?

Back

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Card 4

Front

What is average rate of return?

Back

Preview of the front of card 4

Card 5

Front

What is net present value?

Back

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