Problem

Solving &
Quantitative
Tools
Cost and Revenue
Models
What Is a Cost and Revenue Model?
-is a blueprint that shows how a
startup business will earn revenue or
gross income from its standard
business operations, and how it will
pay for operating costs and
expenses.
Cost and Revenue Model
● Break-even Analysis
● Depreciation
● Discounted Cash Flow
Analysis
● Learning Curve
Discounted
Cash Flow
Analysis
Discounted Cash Flow
-refers to a valuation method
that estimates the value of an
investment using its expected
future cash flows.
DCF analysis attempts to determine
the value of an investment today,
based on projections of how much
money that investment will generate
in the future.
Discounted Cash Flow Formula
DCF= (CF1/(1+r)1) + (CF2/(1+r)2) + (CFn/(1+r)n)
where:
CF1= the cash flow for year one
CF2= the cash flow for year two
CFn= the cash flow for additional year
r= the discount rate
Example:
A company has a current investment value of $24,500, free cash
flow of $450,000, future projected investment returns of $925,000
and a discount rate of 15%. Use this information to perform DCF
analysis over three years by working through the formula:

DCF = [($450,000) ÷ (1 + 0.15)^1] + [($450,000) ÷ (1 + 0.15)^2] +

[($450,000) + (1 + 0.15)^3]

DCF = ($391,304) + ($340,265) + ($295,882)

DCF = $1,027,451
Disadvantage of DCf is its
reliance on estimations of future
cash flows, which could prove
inaccurate.
Learning
Curve
What is a learning curve?
-is a mathematical concept that graphically
depicts how a process is improved over time
due to learning and increased proficiency.
-it was first described by psychologist Hermann
Ebbinghause in 1885 and is used as a way to
measure production efficiency and to forecast
cost.
 Four Common Types of Learning Curve

Diminishing- Increasing-
Returns Decreasing
Learning Curve Return Learning
Curve

Increasing- Complex
Returns Learning Curve
Learning Curve
 Diminishing-Returns Learning Curve

-the rate of progression

increases rapidly at the
beginning and then
decreases over time
 Increasing-Returns Learning Curve

-the rate of
progression is slow at
the beginning and
then rises over time
until full proficiency is
obtained
Increasing-Decreasing Return Learning Curve

-also know as the S-

Curve
-measures an individual
who is new to a task
 Complex Learning Curve

-represents a more
complex pattern of
learning and reflects
more intensive
tracking
 Learning Curve Formula
Y= aXb
where:
Y= the average time over the measured
duration
a= the time to complete the task the first time
X= the total amount of attempts completed
b= the slope of the function (log of the learning curve
percentage divided by the log of 2)
Example:
If the cost to produce the first product is $5,000, and there is a 15%
reduction rate, what is the average cost after making five items?

LR = 100% - rate of reduction

LR = 100% - 15% = 85% = 0.85
The LR value is then used to calculate the variable b:
b = log(0.85)/log2=−0.234465

Therefore,
Y=aXb
=5,000(5)−0.234465
=$3428.36
 Advantages of the learning curve model
Using a learning curve model to track the progress
of various aspects of your company can help you in
the following tasks:

● Strategic planning to improve the output of

employees or even whole departments
● Motivating company staff by creating a culture of
ongoing learning and progress-tracking
● Identifying trends that can be used for more
accurate forecasting and better business decisions
 Disadvantages of learning curve model
● progress is influenced by a number of variables,
including time, previous experience, quality of
training and so on. As a result, tracking only one of
these variables might give you misleading data.
● Some performance or progress is difficult to quantify
and measure. If there is no specific deliverable, such
as a product or a sale, it can be hard to define a
single unit of output for the purpose of measuring
progress.
 Problem
Solving &
Quantitative
Tools
Resource Allocation
and Network Models
Resource Allocation and Network
Models

● Mathematical programming models

● Networks techniques
● Summary of quantitative techniques
Mathematical
Programming
Models
Mathematical Programming Models
❖ A theoretical tool of management science and
economics in which management operations are
described by mathematical equations that can be
manipulated for a variety of purposes.
❖ It is used in planning production schedules, in
transportation, in military logistics, and in calculating
economic growth, by inserting assumed values for the
equations and solving for the unknowns.
❖ It refers to a class of analytical (algebraic) methods
that prescribes the best way to achieve a given
objective while complying with a set of constraints.
 Types of Mathematical Programming Models
● Linear Programming
- Mathematical modeling technique in which a linear function is
maximized or minimized when subjected to various constraints.
- It has been useful for guiding quantitative decisions in business
planning, in industrial design engineering and in the social and
physical sciences.
● Network Optimization
- An optimization problems consists of maximizing a real function by
systematically choosing input values from within an allowed set
and computing the value of the function
● Mixed Integer Programming
- A problem where some of the decision variables are constrained to
be integer values at the optimal solution.
 Types of Mathematical Programming Models

● Nonlinear Programming
- The process of solving optimization problem where some of the
constraints or the objective function are nonlinear.

● Dynamic Programming
- A problem-solving approach, in which we precompute and store
simpler, similar subproblems, in order to build up the solution to a
complex problem.

● Multiple Criteria Optimization

- Mathematical optimization problems involving more than one
objective function to be optimized simultaneously.
 Types of Mathematical Programming Models

● Stochastic Programming
- Framework for modeling optimization problems that involve
uncertainty
- An optimization problem in which some or all problem parameters
are uncertain, but follow known probability distributions.
 Network
Techniques
What is Network Technique?

Network technique is a technique for planning, scheduling,

programming, and controlling the progress of projects. This is
very useful for projects which are complex in nature or where
activities are subject to considerable degree of uncertainty in
performance time.
 Objectives of Network Analysis

1. Minimize Production Delay, Interruptions and Conflicts

2. Minimization of Total Project Cost.
3. Trade-off between Time and Cost of Project.
4. Minimization of Total Project Duration.
5. Minimization of idle resources.
 Network Techniques

A number of network techniques, given below have been developed in recent times:

1. PERT- Programme Evaluation and Review Technique

2. CPM- Critical Path Method
3. RAMS- Resource Allocation and Multi-project Scheduling
4. PEP- Programme Evolution Procedure
5. COPAC- Critical Operating Production Allocation Control
6. MAP- Manpower Allocation Procedure
7. RPSM- Resource Planning and Scheduling Method
8. LCS- Least Cost Scheduling
9. MOSS- Multi-Operation Scheduling System
10. PCS- Project Control System
11. GERT- Graphical Evaluation Review Technique.
What is Programme Evaluation and Review Technique
or PERT

Program Evaluation Review Technique (PERT) is a project

management planning tool used to calculate the amount of time it
will take to realistically finish a project. PERT charts are used to plan
tasks within a project — making it easier to schedule and coordinate
team members.
 Programme Evaluation and Review Technique

In PERT, you create three different time estimates for the project:

➔ Optimistic Time (to)

➔ Pessimistic Time (tp)

➔ Most likely Time (tm)

 Formulae used for Evaluation of PERT

➔ Time Estimate (Te) = (To+Tp+4Tm)/6

➔ Standard Deviation = Tp-To /6

➔ Variance = (Tp-To)^2 / 6
 What is Critical Path Method or CPM

The critical path method (CPM) is a technique where you identify tasks that are
necessary for project completion and determine scheduling flexibilities. A
critical path in project management is the longest sequence of activities that
must be finished on time in order for the entire project to be complete.
 Network of Critical Path Method

➔ Earliest Activity start time(EST)

➔ Earliest Activity finish time(EFT)

➔ Latest Activity finish time(LFT)

➔ Latest Activity start time(LST)

 Types of float
➔ Total float
This is the amount of time that an activity can be delayed from the early
start date without delaying the project finish date or violating a schedule
constraint.
Total float = LS - ES or LF - EF

➔ Free float
This refers to how long an activity can be delayed without impacting the
following activity. There can only be free float when two or more activities
share a common successor. On a network diagram, this is where activities
converge.
Free float = ES (next task) - EF (current task)
 Applications of Network Technique:
Applications of network techniques are very wide, but are very common in
some of the following fields:

➢ Planning,
➢ Construction of buildings, bridges, highways, railways, stadiums,
irrigation projects, factories, power projects etc.
➢ Assembly line scheduling,
➢ Research and development,
➢ Maintenance and overhauling of complicated or large
machineries
 Advantages of Network Technique
1. Detailed and thoughtful planning provides better analysis and logical thinking.
2. Identifies the critical activities and focus them to provide greater managerial
attention.
3. Network technique enables to forecast project duration more accurately.
4. It is a powerful tool for optimisation of resources by using the concept of slack.
5. It provides a scientific basis for monitoring, review and control, to evaluate
effect of slippages.
6. It helps in taking decision;
7. It helps in getting better coordination amongst related fields.
8. It is an effective management tool through a common and simple language,
providing common understanding.
 Disadvantage of Network Technique

1. Network construction of complex project is very difficult and time

consuming in network analysis.

1. Actual time estimation of various activities is a difficult exercise.

1. Analysis of the project is a very difficult work because a number of

resource constraints exist in the project.

1. In many situations time-cost trade off procedure is complicated.

 Limitation of Network Techniques

Network techniques have following limitations:

(i) Network technique is simply a tool to help the management; hence its
effectiveness depends on how well it is used by the management.

(ii) Its accuracy depends on the estimation of the data used in the
network.

(iii) It is useful only if it is updated regularly and decisions for corrective

actions are taken timely.
 SUMMARY
OF
QUANTITATIVE TECHNIQUES
There are several techniques that a manager can
employ while making decisions.These techniques rely
on a scientific and statistical approach to make good
decisions. The following are six such important
quantitative techniques of decision making:
1. LINEAR PROGRAMMING

is a technique used to maximize an objective with

limited resources. It helps in utilizing a resource or
constraint to its maximum potential. Managers
generally use this technique only under conditions
involving certainty, such as circumstances that are
stable and non-uniform.
 2. PROBABILITY DECISION THEORY
This is the premise that we cannot
always accurately predict the outcome
of any course of action. Managers use
this approach to first determine the
probabilities of an outcome using
available information and then rely on
their own subjective judgment for this
purpose.
3. GAME THEORY
Sometimes managers use quantitative techniques only
while taking decisions pertaining to their business
rivals. The game theory approach is one such technique
which simulates rivalries or conflicts between
businesses as a game. In order to do this, managers use
2-person, 3-person and n-person game.
4. QUEUING THEORY

Every business often suffers from waiting

periods or queues pertaining to personnel,
equipment, resources, or ervices. The aim of this
theory is to minimize such waiting periods and
also reduce the amount invested in such
expenses. This theory aims to solve such
problems such as unsold goods due to irregular
demand.
 5. SIMULATION
As the name suggests, the simulation technique
observes various outcomes under hypothetical or
artificial settings. Managers try to understand how
their decisions will work out under diverse
circumstances.Accordingly, they finalize on the
decision that is likely to be the most beneficial to
them. Understanding outcomes under such
simulated environments instead of natural
settings reduces risks drastically.
6. NETWORK TECHNIQUES

Complex activities often require concentrated efforts by

personnel in order to avoid wastage of time and money. This
technique aims to solve this by creating strong network
structures for work. There are two very important quantitative
techniques under this approach - Critical Path Method and
Programme Evaluation & Review Technique. They are effective
because they segregate work efficiently under networks.
THANK
YOU