3.3 Decision Making Techniques

Introduction

• Decision Making Techniques is a complex unit in Theme 3 involving extensive calculations.
• Topics include:
  • Quantitative Sales Forecasting
  • Investment Appraisal
  • Decision Trees
  • Critical Path Analysis

Quantitative Sales Forecasting

• Focuses on the numeracy side rather than factors affecting sales prediction.
• Key methods:
  • Correlation between two variables using scatter diagrams.
    • Identify positive, negative, or no correlation.
    • Stronger correlation if data points are closer to the line of best fit.
  • Extrapolation: Using current data trends to predict future trends.
  • Moving Averages: Smoothing out data fluctuations.
    • Practice calculating 3 or 4 period moving averages via past papers.

Investment Appraisal

• Assessing if an investment is a good financial decision.
• Used for significant investments like new machinery, expansion, etc.
• Methods:
  • Payback Period: Time taken to recoup the initial investment.
    • Example calculation provided: subtract cumulative cash flows by time periods.
  • Average Rate of Return (ARR): Average annual profit as a percentage of the initial investment.
    • Example calculation: Average net profit / Investment cost * 100.
  • Net Present Value (NPV): Considers the time value of money.
    • Future cash flows are discounted based on their temporal distance from present.
    • Example calculation using discount factors and present values.*

Decision Trees

• Decision Trees: Visual tool for evaluating decisions based on potential outcomes and probabilities.
• Example structure:
  • Decisions (squares) with associated costs.
  • Outcomes (circles) with probabilities of success or failure.
  • Expected Value calculation: Weighted average of potential outcomes.
  • Net Gain calculation: Expected Value - Cost.

Critical Path Analysis (CPA)

• Critical Path Analysis: Tool to determine the duration and timeline of a project.
• Key elements:
  • Activities (lines) and Nodes (circles).
  • Earliest Start Times: Calculated from left to right, adding durations.
  • Latest Finish Times: Calculated from right to left, subtracting durations.
  • Critical Path: Longest path in the project where activities cannot be delayed without delaying the project.
  • Float Time: Slack time for non-critical activities.
  • Example calculations for earliest start times, latest finish times, and float times.

Conclusion

• Practice through past exam questions is vital for mastering these techniques.
• Recommended to check relevant videos and resources for comprehensive revision.