Business A-Level revision summaries Borja Jimenez
DECISION MAKING TECHNIQUES (3)
UNIT 3
Contents
DECISION MAKING TECHNIQUES (3)............................................................................................................1
QUANTITATIVE SALES ANALYSIS (9).........................................................................................................1
INVESTMENT APPRAISAL (10)..................................................................................................................2
SIMPLE PLAYBACK................................................................................................................................2
AVERAGE RATE OF RETURN (ARR).......................................................................................................2
NET PRESENT VALUE (NPV)..................................................................................................................3
DECISION TREES (11)................................................................................................................................4
DECISIONS OUTCOMES AND COSTS.....................................................................................................4
CRITICAL PATH ANALYSIS (12)..................................................................................................................5
NETWORK ANALYSIS............................................................................................................................5
CALCULATING THE FLOAT....................................................................................................................7
CONTRIBUTION (13).................................................................................................................................7
QUANTITATIVE SALES ANALYSIS (9)
Sales forecasting is the process of predicting what firms’ future sales will be. A business might use some
quantitative sales forecasting methods to improve the accuracy of sales forecasts.
Time series analysis involves predicting future levels of outcome from historical data. The data used is
known as time series data – a set of figures arranged in chronological order. It relies on sales information
businesses have kept over a given period of time since it occurred. This process can by affected by
different external factors.
The four main components that a business wants to identify are :
The trend: a visible pattern noted after inputting past sales data.
Seasonal fluctuations: changes in demand due to the varying seasons of the year
Cyclical fluctuations: relate to changes in the economy; more sales during a boom and less sales
during a recession
Random fluctuations: surprising or unusual figures that stand out from any trend that is taking
place
IDENTIFYING THE TREND
An analysis of figures will help a business to evaluate whether there is an upward, downward, or
constant trend; it helps to predict what is likely to happen in the future.
1
, Business A-Level revision summaries Borja Jimenez
It is possible to calculate the trend by using a moving average. Moving averages smooth out the
variations in the data. It removes any fluctuations in sales and gives a more obvious picture of the trend
that has been taking place.
When businesses use an even-year moving average, businesses must use a technique known as
centering.
INVESTMENT APPRAISAL (10)
Investment appraisal is a quantitative decision-making technique in which a business objectively
evaluates an investment project to determine whether or not it is likely to be profitable. It allows
businesses to make comparisons among the capital cost1 and net cash flow2 values between different
investment projects.
SIMPLE PLAYBACK
The payback period refers to the amount of time it takes for a project to recover the initial investment.
To calculate this, we use cumulative net cash flows.
Cumulative net cash flow method: Amount required / net cash flow in next year X 12
This equation is used to calculate the time required to recover the remaining capital in the middle of a
specific period.
AVERAGE RATE OF RETURN (ARR)
ARR3 is the total annual average return of an investment expressed as a percentage.
ARR (%) = Net return (profit) per annum / capital outlay (initial cost) X 100
1
The amount of money spent when setting up a new venture
2
Cash inflows - cash outflows
3
Method of investment appraisal that measures the net return per annum as a percentage of the initial spending
2
DECISION MAKING TECHNIQUES (3)
UNIT 3
Contents
DECISION MAKING TECHNIQUES (3)............................................................................................................1
QUANTITATIVE SALES ANALYSIS (9).........................................................................................................1
INVESTMENT APPRAISAL (10)..................................................................................................................2
SIMPLE PLAYBACK................................................................................................................................2
AVERAGE RATE OF RETURN (ARR).......................................................................................................2
NET PRESENT VALUE (NPV)..................................................................................................................3
DECISION TREES (11)................................................................................................................................4
DECISIONS OUTCOMES AND COSTS.....................................................................................................4
CRITICAL PATH ANALYSIS (12)..................................................................................................................5
NETWORK ANALYSIS............................................................................................................................5
CALCULATING THE FLOAT....................................................................................................................7
CONTRIBUTION (13).................................................................................................................................7
QUANTITATIVE SALES ANALYSIS (9)
Sales forecasting is the process of predicting what firms’ future sales will be. A business might use some
quantitative sales forecasting methods to improve the accuracy of sales forecasts.
Time series analysis involves predicting future levels of outcome from historical data. The data used is
known as time series data – a set of figures arranged in chronological order. It relies on sales information
businesses have kept over a given period of time since it occurred. This process can by affected by
different external factors.
The four main components that a business wants to identify are :
The trend: a visible pattern noted after inputting past sales data.
Seasonal fluctuations: changes in demand due to the varying seasons of the year
Cyclical fluctuations: relate to changes in the economy; more sales during a boom and less sales
during a recession
Random fluctuations: surprising or unusual figures that stand out from any trend that is taking
place
IDENTIFYING THE TREND
An analysis of figures will help a business to evaluate whether there is an upward, downward, or
constant trend; it helps to predict what is likely to happen in the future.
1
, Business A-Level revision summaries Borja Jimenez
It is possible to calculate the trend by using a moving average. Moving averages smooth out the
variations in the data. It removes any fluctuations in sales and gives a more obvious picture of the trend
that has been taking place.
When businesses use an even-year moving average, businesses must use a technique known as
centering.
INVESTMENT APPRAISAL (10)
Investment appraisal is a quantitative decision-making technique in which a business objectively
evaluates an investment project to determine whether or not it is likely to be profitable. It allows
businesses to make comparisons among the capital cost1 and net cash flow2 values between different
investment projects.
SIMPLE PLAYBACK
The payback period refers to the amount of time it takes for a project to recover the initial investment.
To calculate this, we use cumulative net cash flows.
Cumulative net cash flow method: Amount required / net cash flow in next year X 12
This equation is used to calculate the time required to recover the remaining capital in the middle of a
specific period.
AVERAGE RATE OF RETURN (ARR)
ARR3 is the total annual average return of an investment expressed as a percentage.
ARR (%) = Net return (profit) per annum / capital outlay (initial cost) X 100
1
The amount of money spent when setting up a new venture
2
Cash inflows - cash outflows
3
Method of investment appraisal that measures the net return per annum as a percentage of the initial spending
2
