Quantitative and Qualitative Decision Making
yenomrah
AD715_L10_Presentation_Fall2019.pdf
Summary Week 9
Team work: progress report and preparation of the datasets for functional areas Marketing Management, Innovation Management & Operations Management
Lecture 10: Financial Management and Decision Making in Organizations
Business Case & B-Sim: Demo Exercise PART 3 (Fin-Mgmt & HR Mgmt) & Part 4 (Performance Management)
Team work: plan for the preparation of a first draft of Assignment 3 (to be completed and discussed in class)
AD 715: Quantitative and Qualitative Decision-Making
Class 10
Boston University MET AD715 © Dr. Zlatev, 2019
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AGENDA
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Boston University MET AD715 © Dr. Zlatev, 2019 2
Financial Management and Decision Making – An Introduction
Overall Goal:
Increase the Intrinsic Value
HOW?
1. Improve FCF
2. Reduce WACC
Boston University MET AD715 © Rich Maltzman, PMP, 2017 3
• Year 1: $50
• Year 2: $75
• Year 3: $100
• Year 4: $110
• Year 5: $110
Projections about the future are inherently inaccurate, since no one has a crystal ball. You also
know that the cash flows you expect to receive in year five can't possibly be worth as much as a
dollar received in year one, because you have to wait a longer time to receive that ‘year 5’ money.
You want to know what the hot dog business is theoretically worth. You believe that the hot-dog
stand is a relatively low-risk venture, and assume that the cash flows should be discounted at a rate
of 10% per year (our cost of capital). We will use a discount rate of 10% and the projections for free
cash flows (listed above). The next step is to start doing the math.
Suppose you own the exclusive right to sell hot dogs at the
neighborhood Little League ballfield. Your exclusive contract expires
in five years, so you don't know what will happen exactly six years
from now. However, you do have a very good idea of what your
sales, profits, and free cash flows should look like for the next five
years in which you are the exclusive hot-dog vendor.
You thus project that the stand will produce the following free cash
flows in each year:
I have intentionally used lighter and
lighter ink to show that the confidence
and value drops as we go into the
future…
C Financial Management and Decision Making – An Introduction
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Discounting the cash flows
To calculate the present value of any cash flow, you need the formula
Thus, for year one, the math would look like this:
Present value = $50 ÷ (1 + .10)^1, which is = $50 ÷ (1.10)^1, which is = $50 ÷ 1.10
Present value = $45.45
In completing the steps, you learn that the present value of $50 is $45.45 at a 10%
discount rate. Thus, we could say the year one cash flow of $50 has a present value
of $45.45.
The year two cash flow would be discounted similarly:
Present value = $75 ÷ (1 + .10)^2, which is = $75 ÷ (1.10)^2, which is = $75 ÷ 1.21
Present value = $61.98
Thus, the second year free cash flow of $75 is equivalent to having $61.98 in our
hands today, assuming we can earn a 10% return on our money.
C Financial Management and Decision Making – An Introduction
Boston University MET AD715 © Rich Maltzman, PMP, 2017
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Year Expected Cash Flow Present value
1 $50 $45.45
2 $75 $61.98
3 $100 $75.13
4 $110 $75.13
5 $110 $68.30
Total $445 $326.00
These steps are repeated until cash flows for all years have been discounted. The table below shows you the answers.
The last and final step is to sum up all the present values of the cash flows for each year to arrive at a present value of all the business's projected free cash flows. We calculate that the TOTAL present value of the free cash flows is $326. Thus, if you were to sell this business based on its expected cash flows and a 10% discount rate,
$326.00 would be a very fair price.
C Financial Management and Decision Making – An Introduction
Boston University MET AD715 © Rich Maltzman, PMP, 2017
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Financial Management: Decision Making Focus
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Financial Management: Decision Support Tools
NEXT
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Boston University MET AD715 © Dr. Zlatev, 2019 8
SLIDE 8
Live Demo
C Financial Management: Decision Support Tools
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Live Demo
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Live Demo
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Boston University MET AD715
© Dr. Zlatev, 2019 11
Live Demo
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Financial Management: Decision Support Tools
OPTIONAL: Risk Analysis (Monte Carlo Simulation)
https://www.youtube.com/watch?v=wpbDB5JNy50
Video’s on Using Excel Add-In MS Solver
https://www.youtube.com/watch?v=K4QkLA3sT1o
Goal-Seeking Analysis (MS Solver)
Are we 100%
confident that this
will be exactly
5.0000000000
days? NO. We vary all of the
durations based on the
probability distribution
info we have on each
of them… and look at
the net effect on the
project’s overall
duration.
Click through to see
each one vary – click
fast if you get bored.
Deriving data for the Monte Carlo Simulation
NOTE: this can be done for duration and/or budget. In this animation, we look at duration.
5 days
So…
Here is an example task in a project.
Financial Management and Decision Making:
Let’s talk about risk, projects, and Monte Carlo Simulation
C Financial Management: Decision Support Tools
Boston University MET AD715 © Rich Maltzman, PMP, 2017
C u m
u la
ti v e P
ro b a b il it
y
100%
0%
50%
S a m
p le
c o u n t
(h o w
m a n y t
im e s w
e g
o t
th is
r e s u lt
)
0
100
200
300
400
Completion Date
Effect of Risk on your schedule! After simulating the project thousands of times
Project Risk Tools – Monte Carlo
Now, we simply plot the
overall results of all of these
thousands, or millions, of
scenarios.
The grey bars represent the
number of samples of the
total duration at each of the
possible completion dates on
the horizontal axis.
Each sample
result builds
up the bar a
notch.
Then we add a cumulative percentage axis (the 0 to 100% on the right side). It’s represented here by the dotted line which will take on an s- shape as it rises slowly at first, quickly in the middle (as the middle dates have more samples per date) and slowly again (the very late dates have few samples also).
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Financial Management and Decision Making:
Let’s talk about risk, projects, and Monte Carlo Simulation
Boston University MET AD715 © Rich Maltzman, PMP, 2017
Financial Management: Decision Support Tools
C u m
u la
ti v e P
ro b a b il it
y
100%
0%
50%
S a m
p le
c o u n t
(h o w
m a n y t
im e s w
e g
o t
th is
r e s u lt
)
0
100
200
300
400
Completion Date
Effect of Risk on your schedule! After simulating the project thousands of times
Project Risk Tools – Monte Carlo
In what completion date do we have 90% confidence?
90%
Now we can use this chart to answer questions. The first is: In what date do
we have 90% confidence that we’ll be done?
Start at the 90% point on the Cumulative
Probability Scale and read over to the dotted line
and down… there is your answer:
25-July-2017
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Financial Management and Decision Making:
Let’s talk about risk, projects, and Monte Carlo Simulation
Boston University MET AD715 © Rich Maltzman, PMP, 2017
Financial Management: Decision Support Tools
C u m
u la
ti v e P
ro b a b il it
y
100%
0%
50%
S a m
p le
c o u n t
(h o w
m a n y t
im e s w
e g
o t
th is
r e s u lt
)
0
100
200
300
400
Completion Date
Effect of Risk on your schedule! After simulating the project thousands of times
Project Risk Tools – Monte Carlo
30%
How confident are we that we’ll finish by 4-July?
We can do this the other way as well. We can pick a date and ask, “how confident are we that we’ll finish by that
date?”
Here we simply start at the date and read up to
the dotted line and then over to the
cumulative probability.
We are 30% confident of meeting 4-July-2017.
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Financial Management and Decision Making:
Let’s talk about risk, projects, and Monte Carlo Simulation
Boston University MET AD715 © Rich Maltzman, PMP, 2017
Financial Management: Decision Support Tools
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C CYCLE 9 Table ‘D-Analysis’Risk Analysis (Monte Carlo Simulation)
CYCLE 9 Table ‘Sim-Report’
Boston University MET AD715 © Dr. Zlatev, 2019
Live Demo To be performed in Class 11 (Based on
Demo Part 4)
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Financial Management: Implementing the Program (BRC Parts 3 & 4)
Step 1: Recognize the Need of a Decision
Step 2: Generate Alternative
Step 3: Assess Alternative
Step 4: Choose Among Alternatives
Step 5: Implement the Chosen Alternative
Step 6: Learn from Feedback
Decision Making Process
Assess Different Alternatives: TAB ‘Fin-Mgt’
1. Insurance (FY-1) only 2. Depreciation (FY-1) only 3. Growth Rate FY-2 only 4. Growth Rate FY-3 only 5. Required Loan Amount (W.C.) 6. Combination 1 + 2 7. Combination 3 + 4 8. Others
Financial opportunity analysis: > Contribution > Fixed costs > Profit before taxes > Free cash flows
Generate Values for Financial Opportunity Analysis (GOALS) Contribution/Products (annual) Fixed costs structure (annual) Profit before/taxes (annual) Free cash flows (monthly)
Apply Different Analyses (TAB ‘D-Analysis’) Compare Alternatives (TAB ‘36-Mo-Fin-Pr’; TAB ‘Performance’; TAB Fin-Statements’) > Results Indicators > Performance Indicators
Demo Part 3 & Part 4 Working with the Business Simulation
Implementation Plan
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Boston University MET AD715 © Dr. Zlatev, 2019 19
HR Management: Implementing the Program (BRC Parts 3 & 4)
Step 1: Recognize the Need of a Decision
Step 2: Generate Alternative
Step 3: Assess Alternative
Step 4: Choose Among Alternatives
Step 5: Implement the Chosen Alternative
Step 6: Learn from Feedback
Decision Making Process
Assess Different Alternatives: TAB ‘Fin-Mgt’
1. Office Assistance (FY-1) only 2. Salesmen (FY-1) only 3. Executive Salaries (FY-1) only 4. Growth Rate FY-2 only 5. Growth Rate FY-3 only Note: (4 & 5) for 1 and/or 2 and/or 3 For Prod. Personnel: 1. Assess TAB ’36-Mo-Fin-Pr’ 2. Adjust (if needed) Var-Costs/Labor
(next cycle, from TAB ‘Oper-Mgt’)
HRM analysis: > Production Personnel > Management
Generate Values HRM Analysis (GOALS)
Retain of Prod. Personnel (annual) Retain of Marketing Personnel (annual)
Apply Different Analyses (TAB ‘D-Analysis’) Compare Alternatives (TAB ‘36-Mo-Fin-Pr’; TAB ‘Performance’; TAB Fin-Statements’) > Results Indicators > Performance Indicators
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Boston University MET AD715 © Dr. Zlatev, 2019
Task 3-1: Based on the business simulation 'Strategies and Decision Support in Organizations' and the business running case, define and present the overall goals and objectives from the business owner point of view.
1. Introduction:
• Problem statement
• Overall goals on objectives of the report
• Structure of the report
2. Managerial decision making process for selected functional areas of the
new business unit
2.1. Selected functional area #1:
3. Application of decision support tools
3.1. Selected functional area #1:
>>> Decision support tool #1.1:
>>> Decision support tool #1.2:
3.3. Selected functional area #3:
>>> Decision support tool #3.1:
>>> Decision support tool #3.2:
4. Evaluation of the results of the business simulation
5. Summary of the results, recommendations, and conclusions
2.2. Selected functional area #2:
2.3. Selected functional area #3:
2.5. Selected functional area #5:
2.4. Selected functional area #4:
Define the location of the restaurant
Define the current status: Who are your customers Who are your competitors Why change is needed
Define the size of the restaurant
Investing in a New Brew Pub: owner’s objectives
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2
3
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Demo Exercise PART 1
Business Running Case (page 3)
Before confirming/rejecting the offer, the owner would like to prepare
a conceptual study, structured as a managerial report that will address
the following questions:
1. Define the overall goals and objectives of the new business unit.
2. Based on the federal and state’s specific legal rules and regulations,
to determine ….
3. Define the business strategy for the next three years of operation …
4. …. 20
1. Introduction:
• Overall goals on objectives of the report
• Structure of the report
2. Managerial decision making process for selected functional areas of the
new business unit
2.1. Selected functional area #1:
3. Application of decision support tools
3.1. Selected functional area #1:
>>> Decision support tool #1.1:
>>> Decision support tool #1.2:
3.3. Selected functional area #3:
>>> Decision support tool #3.1:
>>> Decision support tool #3.2:
4. Evaluation of the results of the business simulation
5. Summary of the results, recommendations, and conclusions
3.2. Selected functional area #2:
>>> Decision support tool #2.1:
>>> Decision support tool #2.2:
3.4. Selected functional area #4:
>>> Decision support tool #4.1:
>>> Decision support tool #4.2:
3.5. Selected functional area #5:
>>> Decision support tool #5.1:
>>> Decision support tool #5.2:
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Boston University MET AD715 © Dr. Zlatev, 2019 21
Task 3-2: Formulate your preparations for a decision making based on a research of all five areas of your study (Marketing Management, Financial Management, Operations Management, Innovation & Technology Management, Organization & HR Management).
1. Introduction:
• Problem statement
• Overall goals on objectives of the report
• Structure of the report
2. Managerial decision making process for selected functional areas of the
new business unit
FUNCTIONAL AREA
For each one of the functional area’s, describe the process and answer the following four questions:
1. Integration of the functional strategy and plans with the company strategies and resources
2. Opportunity analysis (business model, core competency, competitors, differentiators)
3. Developing of three years plans for successful operations per functional area
4. Implementation, management, and control of the functional area three year program
MKTG MGMT
FIN MGMT
OPER MGMT
ORG & HR MGMT
INNOV MGMT
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Task 3-3: For each one of the functional areas (task 3.3) apply at least two from the discussed in this course decision support tools (e.g. Decision Tree, Sensitivity Analysis, SWOT Analysis, PESTEL Analysis, Break-Even Analysis, What-If-Analysis, Risk Analysis, others).
1. Introduction:
• Problem statement
• Overall goals on objectives of the report
• Structure of the report
2. Managerial decision making process for selected functional areas of the
new business unit
2.1. Selected functional area #1:
3. Application of decision support tools
3.1. Selected functional area #1:
>>> Decision support tool #1.1:
>>> Decision support tool #1.2:
3.3. Selected functional area #3:
>>> Decision support tool #3.1:
>>> Decision support tool #3.2:
4. Evaluation of the results of the business simulation
5. Summary of the results, recommendations, and conclusions
2.2. Selected functional area #2:
2.3. Selected functional area #3:
2.5. Selected functional area #5:
2.4. Selected functional area #4:
3.2. Selected functional area #2:
>>> Decision support tool #2.1:
>>> Decision support tool #2.2:
3.4. Selected functional area #4:
>>> Decision support tool #4.1:
>>> Decision support tool #4.2:
3.5. Selected functional area #5:
>>> Decision support tool #5.1:
>>> Decision support tool #5.2:
Decision Tools FUNCTIONAL AREA Decision Tools (BEFORE) (AFTER)
MKTG MGMT 1 1 2 2
FIN MGMT 1 1 2 2
OPER MGMT 1 1 2 2
ORG & HR MGMT 1 1 2 2
INNOV MGMT 1 1 2 2
