Question

Assignment #2 For each of the following topics: (a) Explain to management how it can be put to use in your business.

• Correlation and regression

• Time series

• Capital budgeting

• Linear programming

Remember to clearly indicate the benefits and drawbacks of the method/s and make recommendations for your preferred method/s.

Answer 1

Correlation and regression can be used in business for the purpose of better decision making. Correlation and regression can be used to identify relationships among variables and then interpret them in a manner that will allow business managers to make strategic business decisions. For instance business managers can determine what variables affect their sales quantity. The primary benefit of using correlation and regression is that business managers can make informed decisions. In terms of drawbacks regression and correlation the model assumes that the cause and effect relationship remains unchanged but this is not the case for businesses as the business environment is highly dynamic and cause and effect relationship are prone to frequent changes.

Times series can be used in business to understand the past and predict the future. Essentially time series is a sequence of well-defined data points measured at consistent time intervals. So managers can determine a trend or a pattern with regards to sales, variable costs, overheads etc. In terms of benefits time series enables managers to do descriptive analysis, spectral analysis, as well as forecasting. In terms of drawbacks conclusions drawn from time series analysis is not always perfect.

Capital budgeting can be used in business to determine in which project investments should be made. In other words it helps in determining the best investment option in terms of financial viability and financial feasibility. Management can make use of different techniques of capital budgeting like NPV analysis, IRR analysis, payback period analysis, etc. In terms of benefits capital budgeting can be used to make decisions that has long term consequences. Moreover it leads to making decisions under properly laid out criteria and so there is no element of subjectivity involved. In terms of drawbacks capital budgeting fails to take into consideration qualitative factors.

Linear programming can be used by businesses and the management teams to determine the optimal option given that there are certain constraints which have to be considered while achieving the goal. For instance business managers can seek to maximize profits or minimize costs and can easily use linear programming to determine which combination of factors will help them to achieve their goals considering and factoring in the constraints that are present. In terms of benefits linear programming helps in selecting the best decision in a scenario. In terms of drawbacks linear programming only considers quantitative factors and fails to factor in qualitative factors.

My preferred method is capital budgeting, specially those capital budgeting techniques that considers time value of money. Methods like net present value, internal rate of return, modified internal rate of return etc. have conceptual superiority and always result in selecting that investment proposal that is best for the company in terms of financial attractiveness.