Decision Making Techniques & Investment appraisals and techniques (3.3.1-3.3.3, pages 29-41)

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What do sales forecasts do?
They dictate what information goes into other forecasts e.g predicted sales help a business decide how many staff it needs to hire, how many products it needs to manufacture, how much stock to buy etc.
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What is included within a sales forecast?
Businesses use past data among other factors such as, what happened before will often re-occur.
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What can businesses create with this data?
Business can create a time-series analysis and either calculate or estimate what might happen in the future.
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What is the equation for the average sales per month?
Average sales per month = Total sales for year / number of months in the year
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What is the three period moving average?
This method takes the data from three points (usually the sales from three different months) and averages them.
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Jan: 1200 Feb: 1000 Mar: 4000 What is the monthly moving average for these figures?
1200 (Jan) + 1000 (Feb) + 4000 (Mar) = 6200 So, 6200/3 = 2066
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When placing data into a graph, what should you look for?
Trends within the data. Positive or negative trend?
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What are three and four quarter moving averages used for?
They're used to extrapolate data - i.e. using past results to predicted what might happen in the future.
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What is the cyclical variation?
Many businesses are affected by the seasons, or other repeating patterns which cause regular changes in sales.
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What is the equation for the cyclical variation?
Actual data - Trend data so Monthly sales - Moving Average.
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e.g Work out the cyclical variation for May-July 2016
Sale of central month (June) - Moving Average
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What is the average cyclical variation?
Calculated using the total number of cyclical variations and the sum of their values.
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What is the equation for the average cyclical variation?
Average Cyclical Variation = Total cyclical variations / Number of Cyclical variations
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How can businesses extrapolate data from the cyclical variation and what does it show?
It can show business owners what sales they are likely to expect in a certain month. Average cyclical variations, meanwhile give an informed view of overall expectations year on year.
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What are the limitations of quantitative sales forecasting techniques?
Forecasting techniques use moving averages, which will show different data to what happened. Less useful in periods of change-e.g release of new product. The further a forecast is from the present day the less accurate it is. Shouldn't be usedon own.
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What do business appraisal techniques answer?
Tell businesses how long it will take to get the money back. Tell businesses how profitable a project/investment will be.
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What are the three methods used in investment appraisals?
Simple payback, Average rate of return, Net present value.
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What is the equation for 'payback'?
Payback = Sum invested / Net cash per time period
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What can payback calculations show businesses?
It shows them how long their money will be at risk and how long it'll take to get the original investment back.
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What can payback be useful for?
Can be useful when comparing two projects to see which has the shortest payback period.
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What are the negatives of payback?
This is not a definite estimate as some costs may increase more than expected. A good short-term payback may prevent long term benefits. This method only focuses on payback, not profitability so it is hard to get a full picture of its investment oppo
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What is the average rate of return and what does it show?
The ARR focuses on profitability by comparing the average annual return (from an investment) with the amount of money invested.
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What is the equation for the ARR?
Average rate of return = (Average Annual return / Initial Outlay) x 100
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What is are the calculations you must do before this:
1) Ttl profit over lifetime of investment = ttl net cash flow - invst outlay. 2) Avr annual return = Ttl profit over lifetime of invest / No. of yrs of the investment project 3) aver rate of rtrn = (average annual return /initial outlay) x 100
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What are the benefits of ARR?
Setting targets for profitability - businesses can decide which investments to take based on their profitability (%). Easy to compare two or more opportunities based on profit. For just one investment, you can compare the reward vs the risk.
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What are the disadvantages with ARR?
The method has a narrow focus as it only looks at overall profitability. ARR ignores the timings for when cash flows, i.e. the method does not tell businesses which months/years are the most/least profitable.
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What is discounted cash flow?
While payback only looks at timings and ARR only looks at profitability, discounted cash flow takes both of these into consideration. Businesses achieve this through focusing on the opportunity costs of their investments.
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What are businesses giving up if they choose a discounted cash flow?
They're giving up the interest rate that they could have earned through the bank. This means that business's money is worth more today than the same amount of money in three years time. e.g if interest rates were @ 7% the money would be worth 7% less
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What do businesses use discount factors for?
To work out how much their money would be worth over time. In order to calculate discount factors, businesses need to know how many years the investment will last and the rate of interest.
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What is the calculation for present value over time?
Present value over time = cash flow x discount factor
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What is the net present value?
It allows businesses to compare different projects that involve the same investment.
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What can firms use the NPV to look at?
They can look at the possible outcomes of their investment based on various factors such as: Time period of investment, Differing interest rates, Differing amounts of initial investment, Different structures of cash flow.
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What are the limitations of the NPV?
Two or more projects can only be compared if their initial investments are the same amount. NPV can be very difficult to calculate. The method can also be very difficult to grasp and therefore communicate to the rest of the business.
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What are the limitations of investment appraisal in general?
Can take much time to gather info required for the invst appraisal meaning its expensive to implement and plan. Unforeseen costs and taxes that aren't considered. Difficult to understand. Tend to look at short term benefits rather than long term.
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Card 2

Front

What is included within a sales forecast?

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Businesses use past data among other factors such as, what happened before will often re-occur.

Card 3

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What can businesses create with this data?

Back

Preview of the front of card 3

Card 4

Front

What is the equation for the average sales per month?

Back

Preview of the front of card 4

Card 5

Front

What is the three period moving average?

Back

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Comments

thewincert

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Thank you for your presentation. Without a sales forecast, we will either be in a shortage or an overstock situation. In both cases, we are losing money.
thewincert

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Also, in the case of working in several markets, the sales forecast allows us to redirect our efforts to the necessary market in advance, thereby reducing the risks and costs of a seasonal decline or rise in sales. But if you don't want to do it personally, then there is the wall street forex robot software, which will trade the exchange for you.

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