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chapter 24
Analytics for Managerial
Decision Making
goals discussion goals achievement fill in the blanks multiple choice problems check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
What is a relevant cost, and what is a sunk cost?
Why does decision making necessarily focus on the future?
Describe the steps in the general approach to decision making.
In addition to quantitative factors, what else should be considered in the decision making process?
Be able to perform calculations related to outsourcing decisions ("make or buy").
Define "opportunity cost" and note its importance in the decision process.
Be able to perform calculations for special order pricing decisions.
Know why the contribution margin must be analyzed in terms of capacity constraints.
Be able to perform calculations for addition or deletion of products (or departments) in decision making.
What is a capital expenditure?
Describe the capital budgeting process.
What is meant by the "time value of money?"
Be able to calculate compound interest.
Understand the relationship between compound interest and present value.
Be able to calculate future value and present value of lump-sum and annuity amounts.
Be able to calculate the net present value of an investment, and explain the method's strengths and weaknesses.
How does depreciation impact cash flow calculations?
Explain and perform cash-flow calculations on a net-of-tax basis.
Be able to calculate the accounting rate of return for an investment, and explain the method's strengths and weaknesses.
Be able to calculate the internal rate of return for an investment, and explain the method's strengths and weaknesses.
Be able to calculate the payback period for an investment, and explain the method's strengths and weaknesses.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| accounting rate of return | A project evaluation tool that focuses on accounting income rather than cash flows; average annual increase in income by the amount of initial investment. |
| annuity | Level streams of payments; with each payment being the same, and occurring at a regular interval |
| annuity due | Also known as an annuity in advance; involves a level stream of payments, with the payments being made at the beginning of each time period |
| capital expenditure decision | Also known as capital budgeting; planning and decision making related to longer term projects and expenditures |
| future value | Or "compound interest;" amount that a current payment (or stream of payments) will grow in time; includes interest on previous interest based on frequency of compounding |
| internal rate of return | Also known as time-adjusted rate of return or IRR; discount rate causing present value of cash inflows to equal present value of the cash outflows |
| net present value | Or NPV, a method of evaluating capital projects that uses a predetermined interest rate to determine the present value of an investment's cash net cash inflows and outflows |
| opportunity cost | The cost of a foregone alternative; may include lost revenue |
| ordinary annuity | Also known as an annuity in arrears; involves a level stream of payments, with the payments being made at the end of each time period |
| outsourcing | Utilization of independent parties to manufacture products (sometimes known as make-or-buy) or manage data processing, tech support, payroll services, etc. |
| payback | Easy method for evaluating capital projects; calculated by dividing the initial investment by the annual cash inflow |
| present value | Also known as discounting; determines the current worth of cash to be received in the future |
| relevant cost | Items where future costs and revenues are expected to differ for the alternative decisions under consideration |
| special order | A customer order that is outside of the normal pricing and terms |
| sunk cost | Historical amount expended on a project or object; not relevant to current decisions or future actions |
| time value of money | Conceptual notion holding that money to be received sooner is worth more than money to be received later |