Module 3 – Case
LINEAR REGRESSION FORECASTING AND DECISION TREES
Linear Regression Forecasting
Assignment Overview
Scenario: You are a consultant who works for the Excellent
Consulting Group. Your client, the ABC Furniture Company, believes that there
may be a relationship between the number of customers who visit the store
during any given month (“customer traffic”) and the total sales for that same
month. In other words, the greater the customer traffic, the greater the sales
for that month. To test this theory, the client has collected customer traffic
data over the past 12-month period, and monthly sales for that same 12-month
period (Year 1).
Case Assignment
Using the customer traffic data and matching sales for each
month of Year 1, create a Linear Regression (LR) equation in Excel. Use the
Excel template provided (see “Module 3 Case – LR –Year 1” spreadsheet tab), and
be sure to include your LR chart (with a trend line) where noted. Also, be sure
that you include the LR formula within your chart.
After you have developed the LR equation above, you will use
the LR equation to forecast sales for Year 2 (see the second Excel spreadsheet
tab labeled “Year 2 Forecast”). You will note that the customer has collected
customer traffic data for Year 2. Your role is to complete the sales forecast
using the LR equation from Step 1 above.
After you have forecast Year 2 sales, your Professor will
provide you with 12 months of actual sales data for Year 2. You will compare
the sales forecast with the actual sales for Year 2, noting the monthly and
average (total) variances from forecast to actual sales.
To complete the Module 3 Case, write a report for the client
that describes the process you used above, and that analyzes the results for
Year 2. (What is the difference between forecast vs. actual sales for Year 2—by
month and for the year as a whole?) Make a recommendation concerning how the LR
equation might be used by ABC Furniture Company to forecast future sales.
Data: Download the Module 3 Case template here: Data chart
for BUS520 Case 3. Use this template to complete your Excel analysis.
Assignment Expectations
Excel Analysis
Accurate and complete Linear Regression analysis in Excel.
Written Report
Length requirements: 4–5 pages minimum (not including Cover
and Reference pages). NOTE: You must submit 4–5 pages of written discussion and
analysis. This means that you should avoid use of tables and charts as “space
fillers.”
Provide a brief introduction to/background of the problem.
Your written (Word) analysis should discuss the logic and
rationale used to develop the LR equation and chart.
Provide complete, meaningful, and accurate recommendation(s)
concerning how the ABC Furniture Company might use the LR equation to forecast
future sales. (For example, how reliable is the LR equation in predicting
future sales?) What other recommendations do you have for the client?
Module 3 – SLP
LINEAR REGRESSION FORECASTING AND DECISION TREES
Decision Trees
Scenario: You are a consultant who works for the Excellent
Consulting Group. You have learned about three different investment
opportunities and need to decide which one is most lucrative. Following are the
three investment options and their probabilities:
Option A: Real Estate development. This is a risky
opportunity with the possibility of a high payoff, but also with no payoff at
all. You have reviewed all of the possible data for the outcomes in the next 10
years and these are your estimates of the cash payoff and probabilities:
Required initial investment: $0.85 million
High NPV: $6 million, Pr = 0.50
Medium NPV: $2.5 million, Pr = 0.35
Low NPV: $0, Pr = 0.15
Option B: Retail franchise for Just Hats, a boutique-type
store selling fashion hats for men and women. This also is a risky opportunity
but less so than Option A. It has the potential for less risk of failure but
also a lower payoff. You have reviewed all of the possible data for the
outcomes in the next 10 years and these are your estimates of the payoffs and
probabilities.
Required initial investment: $0.50 million
High NPV: $3.5 million, Pr = 0.70
Medium NPV: $2.1 million, Pr = 0.20
Low NPV: $1 million, Pr = 0.10
Option C: High Yield Municipal Bonds. This option has low
risk and is assumed to be a Certainty. So there is only one outcome with
probability of 1.0:
Required initial investment: $0.65 million
NPV: $1.7 million, Pr = 1.0
Assignment
Develop an analysis of these three investments, and
determine which of them you should choose. Be sure to account for cash paid for
each of the three alternatives. If you do not recall how to do this, review the
practice exercises at the Background page. Do your analysis in Excel using the
Decision Tree add-in.
Write a report to your private investment company and
explain your analysis and your recommendations. Provide a rationale for your
decision.
Upload both your written report and Excel file with the
decision tree analysis to the SLP 3 Dropbox.
SLP Assignment Expectations
Analysis
Accurate and complete Excel analysis.
Written Report
Length requirements: 2–3 pages minimum (not including Cover
and Reference pages)
Provide a brief introduction to/ background of the problem.
Written analysis that supports Excel analysis and provides
thorough discussion of assumptions, rationale, and logic used.
Complete, meaningful, and accurate recommendation(s).
