3.3 Decision-Making Techniques Flashcards
How is Centering defined?
A method used in the calculation of a moving average where the average is plotted or calculated in relation to the central figure.
How is Correlation defined?
The relationship between two sets of variables.
How is Correlation Coefficient defined?
A measure of the extent of the relationship between two sets of variables.
How is Moving Average defined?
A succession of averages derived from successive segments (typically of constant size and overlapping) of a series of values.
How is Scatter Graph defined?
A graph showing the performance of one variable against another independent variable on a variety of occasions. It is used to show whether a correlation exists.
How is Time Series Analysis defined?
A method that allows a business to predict future levels from past figures.
What are the four main components of Time Series Data?
- Trend
- Seasonal Fluctuations
- Cyclical Fluctuations
- Random Fluctuations
How can you identify the trends?
- Moving Average –> to calculate this you add the number or sales up per year/quarter etc. then divide by the same amount you have added up
- four-period centred moving average –> can be used by finding the midpoint of a four-year moving total and a eight-year moving total.
- to work this out divide the eight year moving total by eight
How can you predict future trends from a graph?
- Using a line of best fit
- by plotting the values from the four-period moving average onto a graph accurately and then adding the line of best fit ‘by eye’, so that points fit equally either side of the line.
- This line can be extended should help give a reasonable prediction
What equations can you use to help draw the line of best fit?
- when drawing a line of best fit it should pass through the coordinates (X,Y), where X is the average of the years and Y is the average sales:
- X = (the sum of the years)/ (number of years)
- Y = (the total sales in the trend)/ (the number of years)
How can we calculate the variation from the trend?
- predictions may not be accurate because it is taken from the trend, and the trend ‘smoothed out; variations in sales.
- To make an accurate prediction the business will have to fine the average variation over the period and take this into account.
- To find out how much variation there is we must –> V= Actual Sales - Trends
How can we use trends from Seasonal Variation to make more accurate predictions?
- trends are the smoothed out figures that smoothed out the variation.
- If a set of data has been sorted with four-period centred average using the financial Quarters in the year we can make a more accurate prediction by calculating the average seasonal variation in the each quarter ( e.g. average of the 4th Quarters from the data etc.)
When is Quantitative Sales Forecasting likely to be more reliable?
- The forecast is for a short period of time in the future, such as six months, rather than a long time. such as five years
- The are revised frequently to take account of new data and other informaiton
- The market is slow changing
- Market research data, including test marketing data, is avaible
- Those preparing the forecast have a good understanding of how to use data to produce a forecast
- Those preparing the forecast have a good ‘feel’ for the market and can adjust the forecast to take account of their hunches and guesses about the future
How can some forecasting account for changes even if the forecast should be reliable?
- by creating a forecast range
- by preparing 3 set of figures –> a optimistic, a pessimistic and a central forecast
- these give the best and worst case scenarios aswell as the central forecast, the one that is most likely to occur
- this give the departments in a business an indication of the possible variations they might have to face.
How can we use Causal Modelling with Time Series Analysis?
- Time series analysis only describes what is happening to information
- Casual modelling tries to explain data, usually by finding a link between on set of data and another
- this can be done by plotting the two variables on a scatter graph and looking at the correlations which can be show better with a line of best fit
What is the Correlation Coefficient?
- It can be calculated form two sets of data that would usually go on a scatter graph
- it is possible to calculate the extent of the relationship through the following formula;
r = ΣXY/sqrt((ΣX^2) x (ΣY^2))
What does a Correlation Coefficient of 1 mean?
- means that there is an absolute positive relationship between the two variables.
- All points in the scatter graph fall on the line best fit and the line slopes upwards from left to right.
- As the value of the independent variable, increase so do the dependent variable values
What does a Correlation Coefficient of 0 mean?
means that there is no relationship between the variables
What does a Correlation Coefficient of -1 mean?
- means that there is an absolute negative relationship between the two variables.
- All points in the scatter graph fall on the line of best fit and the line slopes downwards from left to right.
- As the value of the dependent variable falls
Why may a business what to be careful when basing there decisions on Coefficient Correlation?
- Any value that falls below 0.7 make it difficult to see any correlation from the scatter graph
- A large rise in one of the Variable may be unrelated to other other factors and could have been affect by something completely different
- There are sometimes examples of ‘nonsense correlations’. These are correlation coefficients that appear to show a strong relationship between two variables, when in fact the relationship between the figures is pure coincidence
When would a Business use Qualitative Forecasting?
- uses people’s opinions or judgements rather than numerical data
- a business could base its prediction on the views of so-called experts, or on the opinions of experience managers
- these methods are useful when there is insufficient numerical data or where figures date quickly because the market is changing rapidly
How is Average Rate of Return or Accounting Rate of Return (ARR) defined?
A method of investment appraisal that measures the net return per annum as a percentage of the initial spending.
How is Capital Cost defined?
The amount of money spent when setting up a new venture.
How is Discounted Cash Flow (DCF) defined?
A method of investment appraisal that takes interest rates into account by calculating the present value of future income.
How is Investment defined?
The purchase of capital goods.
How is Investment Appraisal defined?
The evaluation of an investment project to determine whether or not it is likely to be worthwhile.
How is Net Cash Flow defined?
Cash inflows minus cash outflows.
How is Net Present Value (NPV) defined?
The present value of future income from an investment project, minus the cost.
How is Payback Period defined?
The amount of time it takes to recover the cost of an investment project.
How is Present Value defined?
The value today of a sum of money available in the future.
What is Investment?
Investment or Capital Investment describes the process of purchasing fixed assets, such as new buildings, plant, machinery and office equipment. It refers to the purchase of any asset which the business plans to own, and will pay for itself, over a period of more than 1 year.
This may include:
- Replacement or renewing existing assets that have worn out (depreciated) or become obsolete
- Introduce new assets to meet changes in demand
