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Business Information& Decision Making
Prof. Rushen Chahal
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L
ets get warmed upA. Introduce yourself to the class
B. What decisions have you made recently?
Examples:
Personal
Academic
Economic or Business
What do you think & feel about your decision(s)
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L
ets get warmed up Me 1
st
!A. Introduce yourself to the class: Richard Derbyshire
B. What decisions have you made recently?
Examples:
Personal: I climbed Mt. Lincoln a week ago: >5K feet
Academic: EC & programming goals: Java, Squeak, etc
Economic: I bought lots! of books in the USA
What do you think & feel about your decision(s)My knee still hurts!!! But, Id do it again, only better prepared
next time!
Need to make spare time to work on programming/EC goals
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L
ets get warmed up me 1
st
Mt. Lincoln, New Hampshire White MountainsAltitude > 5000 feet (1666 meters)
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Business Information
& Decision Making
Introduction: First Day
Textbook: Quantitative Methods forBusiness, by Donald Waters, 3rd edition.
Instructor: Richard (Rich) Derbyshire [email protected]
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Business Information
& Decision MakingTextbook: Quantitative Methods for Business, by
Donald Waters, 3rd edition.
Our plan for this semester: (??? = 2 weeks / chapter ???) Ch7: Calculations with Money
Ch9: Business Forecasting
Ch10: Planning with Linear Programming
Ch11: Using Calculus to Describe Changes Ch16: Analyzing Business Decisions
Ch17: Controlling Stocks
Ch18: Planning Projects with Networks
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Business Information
& Decision MakingOurLearning Process:
A. L
earn Concepts & DefinitionsB. Understand Application of Concepts
C. Practice (problem solving)
Lots! of practice will be key to learning Defining the Problem (Modeling)
Finding Solutions (Calculations, Analysis, Decisions)
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Business Information
& Decision MakingOurLearning Process:
L
ots!of practice will be
keyto learning
Defining the Problem (Modeling) Situation Analysis
Problem Definition (mathematical &/ mental model)
Finding Solutions Calculations Analysis
Decisions
Evaluation
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Business Information
& Decision MakingRecommended:
Attend every class: this makes learning a difficult
subject much easier Do all reading & assignments (keep a workbook)
Use class time to perfect your knowledge, takegood notes
Ask questions
Practice a lot
Review often
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Business Information
& Decision MakingFirst assignment: (see next slide, also)
Look over the entire textbook, to get an idea ofthe book and its contents
Look over Chapters 7,9,10,11,16,17,18
Make sure you have the proper mathematical
background to understand these subjects, such asknowledge of basic calculus, basic accounting &finance report to me any issues
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Business Information
& Decision MakingFirst assignment:
Read Chapter 7 in your textbook Study Worked Examples carefully
Answer all self assessment questions as youprogress through the chapter
Work Problems at the end of the chapter, aswe progress through each topic. Be ready toreview in class.
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Business Information
& Decision Making I will try to make this class as interesting as
possible:
I will need your help (participation) This topic requires a lot of math & analytical
skills (& Deep Thinking, i.e. Critical Thinking)
This topic can be both very interesting & very
grueling (hard work), at times.
***If you master this subject, you will havedeveloped a critical and extremely valuablemanagement skill***
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Business Information
& Decision Making
Chapter 7: Calculations with Money
Subjects covered: Financial Ratios
Break-Even Point
Value of Money Over Time Mortgages, Annuities & Sinking Funds
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Business Information& Decision Making Example1
Chapter 7: Calculations with Money Example:
You have decided to purchase a new automobile, and the
negotiated price is $20,000. You make a down payment of$2,000 and finance the remaining $18,000.
At this point the loan officer of the dealership asks you
a) Would you rather go with a 3% APR and no
manufacturer's rebate,b) or select a 9% APR which includes a $1,500
manufacturers rebate?
What else do you need to know to choose the better
deal? What choice would you make?2/10/2012
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Business Information& Decision Making Example2
You are studying for yourInformation and Business Decisions Final and have acraving for a fresh pizza. You cant spare the time to pick up the pizza andmust have it delivered.
Perfect Pizza offers a 1 thick (including toppings), 20 square pizza with yourchoice of two toppings for $15 plus 5% sales tax and a $1.50 delivery charge (no
sales tax on delivery charge).
Freds Pizza offers the round, deep-dish Pizza Bomb which is 20 inches in
diameter. It is 1-3/4 thick, which includes two toppings, and costs $17.25 plus 5%sales tax and free delivery.
(a) What is the problem in this situation?
(b) Assuming that your common unit of measure is $ (i.e., cost), what is the bettervalue for
getting a pizza based on the criterion of minimizing cost per unit of volume?
(c) What other criteria might be used to select which pizza to purchase?
What is your choice?2/10/2012
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Business Information& Decision Making
Chapter 7: Learning Objectives
Financial Ratios Consider Financial Ratios
Understand Use of Ratios & Importance
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Business Information& Decision Making
Chapter 7: Learning Objectives
Break-Even Point Construct a Break-Even Graph
Calculate Break-Even Points
Understand Economies of Scale
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Business Information& Decision Making
Chapter 7: Learning Objectives
Value of Money Over Time
Calculate Investment Values Simple Interest
Compound Interest
Calculate PV (Present Value)
Calculate IRR (Internal Rate of Return)
Calculate Depreciation of Assets
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Business Information& Decision Making
Chapter 7: Learning Objectives
Mortgages, Annuities & Sinking Funds Calculate payments:
Sinking Funds
MortgagesAnnuities
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An Experiment!
Beijing Olympic Lemonade!!!
Phase One: Our IdeasHow to make money selling lemonade?
Brain Map
Main Idea
PMI
Refined Idea 2/10/2012
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An Experiment!
Beijing Olympic Lemonade!!!
Phase Two: Analysis (Angel Investment 20,000RMB)
What do we need? (How were going to do it?)
Break-even? (7.2 in our book)
Economy of Scale? (7.2.2 in our book)
Looking at some ratios (7.1 in our book)
Go?, or No Go?
or How to Make a Go?
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B
Ratios are a means of highlighting relationshipsbetween financial statement items. Generally,ratios are used in two ways: for internal analysisof items in a balance sheet; and/or for
comparative analysis of a companys ratios atdifferent time periods and in comparison to otherfirms in the same industry.
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B
D&B uses fourteen key financial businessratios to measure a companys solvency,efficiency and profitability.
The ratios are divided into three groups:
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B
Solvency Ratios measure the financialsoundness of a business and how well thecompany can satisfy its short- and long-
term obligations
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B
Efficiency Ratios measure the quality of thefirms receivables and how efficiently it uses andcontrols its assets, how effectively the firm ispaying suppliers, and whether the firm is
overtrading or undertrading on its equity (usingborrowed funds).
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B
Profitability Ratios measure how well acompany performs; analyze how profitwas earned relative to sales, total assets
and net worth.
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B Solvency Ratios (6)
Quick Ratio
"Acid test" or"liquid" ratio
Measures the extent to which a business can cover its current liabilities withthose current assets readily convertible to cash.
Shows number of dollars of liquid assets available to cover each dollar ofcurrent debt.
Any time the ratio is 1:1 (1.0), the business is said to be in a liquid condition.The larger the ratio, the greater the liquidity.
Cash + Accounts Receivable Current Liabilities
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B SolvencyRatios (6)
Current Ratio
Measures the degree to which current assets cover current liabilities.
The higher the ratio, the more likely the company will be able to meetits liabilities. A ratio of 2 to 1 (2.0) or higher is desirable.
Current Assets Current Liabilities
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B SolvencyRatios (6)
Current Liabilities to Net Worth Ratio (%)
Indicates the amount due creditors within a year as a percentage of theowners' or stockholders' investment.
Measures the funds creditors are risking with a business temporarilyagainst the funds permanently invested by its owners.
Normally a business starts to have trouble when this relationshipexceeds 80%.
Current Liabilities Current Net Worth
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B Solvency Ratios (6)
Total Liabilities to Net Worth Ratio (%)
Shows how all of the companys debt relates to the equity of the owner orstockholders.
The higher this ratio, the less protection there is for creditors.
If total liabilities exceed net worth then creditors have more at stake than
stockbrokers.
The difference between this ratio and Current Liabilities to New WorthRatio is that it pinpoints the relative size of long-term debt, which canburden a firm with substantial interest charges.
Total Liabilities Net Worth 2/10/2012
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B Solvency Ratios (6)
Fixed Assets to Net Worth (%)
Shows the percentage of assets centered in fixed assetscompared to total equity.
Generally the higher this percentage is over 75%, the morevulnerable a concern becomes to unexpected hazards andbusiness climate changes. Capital is frozen in the form ofmachinery and the margin for operating funds becomes toonarrow to support day-to-day operations.
Fixed Assets Net Worth
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B EfficiencyRatios (5)
Collection Period Ratio (Days)
Helpful in analyzing the collectibility of accounts receivable, orhow fast a business can increase its cash supply.
Accounts Receivable Sales x 365 Days
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B EfficiencyRatios (5)
Sales to Inventory Ratio
Measures how fast inventory is moving the cash flow into thebusiness.
When this ratio is high, it may indicate a situation where sales arebeing lost because a concern is understocked and/orcustomers are buying elsewhere.
If the ratio is too low, this may show that inventories are obsoleteor stagnant.
Annual Net Sales Inventory2/10/2012
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B EfficiencyRatios (5)
Assets to Sales Ratio (%)
Rates sales to the total investment that is used to generate those sales.
If percentage is abnormally high, it indicates that a business is notbeing aggressive enough in its sales efforts, or that its assets arenot being fully utilized. A low ratio may indicate a business is sellingmore than can be safely covered by its assets.
Total Assets Net Sales
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B EfficiencyRatios (5)
Sales to Net Working Capital Ratio
Measures the number of times working capital turns over annually inrelation to net sales. Should be viewed in conjunction with theassets to sales ratio.
A high turnover rate can indicate overtrading (excessive sales volumein relation to the investment in the business). A high turnover may
indicate that the business relies extensively upon credit granted bysuppliers or the bank as a substitute for an adequate margin ofoperating funds.
Sales Net Working Capital or Sales (Current Assets Current Liabilities)
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B EfficiencyRatios (5)
Accounts Payable to Sales Ratio (%)
Measures how the company pays its suppliers in relation to the salesvolume being transacted.
A low percentage would indicate a healthy ratio. A high percentageindicates the firm may be using suppliers to help finance operations.
Accounts Payable Net Sales
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B Profitability Ratios (3)
Return on Sales (%)
Profit Margin
Measures profits after taxes on the years sales (profits earned perdollar of sales).
The higher this ratio, the better prepared the business to handledowntrends brought on by adverse conditions.
Net Profit AfterTaxes Net Sales
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B Profitability Ratios (3)
Return on Assets Ratio (%)
The key indicator of profitability.
A high percentage tells you the company is well run and has a healthyreturn on assets.
Net Profit After Taxes Total Assets
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Business Information& Decision Making
Fourteen Key Business Ratios Used by D&B Profitability Ratios (3)
Return on Net Worth (%)
Return on Equity
Measures the ability of a companys management to realize anadequate return on the capital invested by the owners.
Net Profit AfterTaxes Net Worth
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Business Information& Decision Making
Lets look at some real businesses:
Seven-Eleven Convenience Stores
Starbucks Coffee Shops
CVS Pharmacy Stores
Take a look over the annual reports and see what you thinkWhat types of data, information do you see?
How about financial & performance ratios &/ statistics?
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Business Information& Decision Making
Chapter 7: Calculations with Money
Financial Ratios
Break-Even Point
Value of Money Over Time
Mortgages, Annuities & Sinking Funds
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