Running head: 4-2 SCENARIO ANALYSIS 1

4-2 Scenario Analysis: Cars Sold

Stephanie Elliott
QSO 510: Quantitative Analysis
Dr. Danielle Babb
7 November 2021
4-2 SCENARIO ANALYSIS 2

A finance manager employed by an automobile dealership believes that the number of

cars sold in his local market can be predicted by the interest rate charged for a loan.

Interest Rate (%) Number of Cars

Sold (100s)
3 10
5 7
6 5
8 2

The finance manager performed a regression analysis of the number of cars sold and

interest rates using the sample of data above.

Regression Statistics Coefficient

Multiple R 0.998868 Intercept 14.88462
R2 0.997738 Interest Rate -1.61538

1. Are there factors other than the interest rate charged for a loan that the finance manager

should consider in predicting future car sales?

There are other variables to consider aside from interest rates when attempting to

predict future car sales. Markets should pay close attention to consumer trends such as

preferences on make, model, color, safety options, rebates, and pricing options.

Additionally, the health of the oil industry’s (current pricings) and any other economical

or social events (such as a pandemic) that might affect how consumers spend should also

be analyzed.
4-2 SCENARIO ANALYSIS 3

2. Is interest rate charged for a loan the most important factor to be considered in predicting

future ca sales? Explain your reasoning. The dealership’s vice-president of marketing

has requested a sales forecast at the prevailing interest rate of 7%.

The R Squared or coefficient of determination analyzes the variances in a variable

that can be explained by differences in the second variable (Bloomenthal, 2021). It tells

us how well the data fits within the model. In contrast, the Multiple R shows us the

multiple correlations between the two variables and how strong that linear relationship is.

For this scenario the R Squared is 0.997 (97%) which indicates that 97% of the data fits

in the regression model meaning, that the interest rates are important for predicting future

car sales.

3. As finance manager, what reasons would you convey to the vice-president in

recommending this forecasting model?

As previously stated, the R square for this data indicate a strong relationship

between low interest rates and higher car sales. Additionally, the correlation between

both variables -which is about 99.8%- cannot be ignored. A strong correlation (values

greater than 0) indicates that both variables are strongly connected (Nickolas, 2021).

With a near perfect relationship between both of the variables, the forecasting model

should not be ignored. Instead it should be utilized to determine strategies for future sales

quarters

4. Is the prediction of car sales at 7% a reflection of the current downturn in the economy?

How might this impact the dealership’s business?

A negative coefficient indicates that both variables move at the same time but in

opposite directions. In this scenario as interest rates decline the number of car
4-2 SCENARIO ANALYSIS 4

sales will rise. The prediction of car sales at a 7% interest rate is indicative of a

economic downturn for the market since the number of car sales will dramatically

decrease. Such an event poses a threat to the dealership ability to turn a profit for

the quarter or the year since customers are less likely to purchase vehicles during

this time.
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References

Bloomenthal, A. (2021, October 10). Coefficient of Determination? Investopedia. Retrieved

November 7, 2021, from https://www.investopedia.com/terms/c/coefficient-of-

determination.asp

Nickolas, S. (2021, May 31). What do Correlation Coefficients Positive Negative, and Zero

Mean? Investopedia. Retrieved November 7, 2021,

https://www.investopedia.com/ask/answers/032515/what-does-it-mean-if-correlation-

coefficient-positive-negative-or-zero.asp