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Topics

Time Value of Money Concepts


Bond Valuation Theory Concepts
Sampling Concepts
Regression and Correlation Concepts
Linear Programming Concepts
Simulation Concepts

Time Value of Money

Objectives
What do we mean by Time value of
money
Present Value, Discounted Value,
Annuity

Time Value approach


Time value of money is the concept
of measuring the value of money
over time.
Why do we consider?
Because value of money changes
with time and its crucial to analyse
our investment to be able to
measure and solve for those
changes.

Time Value approach


People prefer present consumption to
future consumption demand more in
future to give up present consumption
Inflation effect Greater inflation and
erosion of value
Uncertainty of receiving cash flow in future
Greater the risk, greater the erosion in
value
Process by which future cash flows are
adjusted to reflect these factors is called
discounting and magnitude of these
factors is called discount rate

Discount Rate
Rate at which present and future cash
flows are traded off.
It incorporates
The preference for current consumption
(greater preference ____ Higher discount rate).
Expected inflation (higher inflation ____ higher
discount rate).
The uncertainty in the future cash flows (higher
risk ____ higher discount rate).
A higher discount rate will lead to a lower
present value for future cash flows

Rate of Interest
Nominal or market rate of
interest rate = Real rate of
interest + Expected rate of
Inflation + Risk of premiums to
compensate uncertainty

Compounding concepts
FVn P * (1 i )

Compounding effect increases with both


rate and compounding period
As length of holding period increases,
small differences in rate can lead to
large differences in future values
Common rule of 72 Doubling the value

Time Value of Money


What is Time Value of Money?
Future Value
Present Value

Future Value: Compounding:

How would you


do
Compounding?

Compounding
Compounding Formula
FVn P * (1 i ) n
What if compounding is done on monthly
n*t
basis?
i
FVn P * 1
t

Micros oft Office


Excel Works heet

Effective Interest Rate


True rate of interest Takes into
account compounding effects of
more frequent interest payments
Effective Interest Rate = (1+Stated
Annual Interest Rate/N)n -1
As compounding becomes frequent,
effective rate increases and present
value of future cash flow decreases

Charting of Cashflow

For any financial proposition prepare a chart of cashflow:


e.g.

Interest Received
Sold Bond
Total

Interest Received +50


01.01.0
8

31.12.08

Timeline
30.06.08

Invested in Bonds
(1,000)

+ 100
+2,050
+2,150

30.06.08
Interest Received
New Bond Purchased
Net

+ 50
(1,020)
( 970)

Discount Rate
Rate at which present and future
cash flows are traded off
Higher discount rate lower the
present value for future cash flows

Discounting
Present Value
You have an option to receive Rs. 1,000/- either today or
after one year. Which option you will select? Why?
Decision will depend upon the present value of money;
which can be calculated by a process called
Discounting (opposite of Compounding)
Interest Rate and Time of Receipt of money decide
Present Value
What is the present value of Rs. 1,000/- today and a year
later?
Let us find out Present Value?

Discounting

contd

Formula to find Present Value of Future Cash Receipt


PVn

1 i n

Where PV = Present Value, P = Principal, i = Rate of Interest, n =


Number of Years after which money is received

Assuming Rate of Interest is 10%, value of Rs. 1,000/- to be


received after 1 year will be,
909.09

1000

1 10% 1

Whereas the value of money to be received today will be Rs.


1,000/What if you were to choose between:
a.

Receive Rs. 1,000/- every year for 3 years, OR

b.

Receive Rs. 2,500/- today? (assume 10% annual interest rate)

Discounting of a Series

How discounting is done for a series of cashflow? e.g.


Receive Rs. 1,000/- at the end of every year for 3 years OR
Receive Rs. 2,500/- today
Assume Rate of Interest @10%

If cashflow was to occur every 6 months instead of 1 year, what impact


it will have on Present Value?

Periodic Discounting
What if the receipts are over six
months interval ? Find Present Value of
the money receipts
Receive Rs. 1,000/- at the end of every 6 months for 1-1/2 years OR
Receive Rs. 2,600/- today
Assume Rate of interest @10%

Periodic Discounting Formula


PV

i
1
t

Where, P = Principal, i = Rate of


Interest,
t = Times Payments made in a Year,
n = nth Period (in this case it is half
year)

Periodic Discounting
Formula
Expressed mathematically, the equation will look like:
2723 .25

1000
10 %
1

1000
10 %
1

1000
10 %
1

Genericallyexpressed,
expressed,
Generically
theformula
formulais:
is:
the

PV
N

xn
Assuming Discounting Done Semi-Annually

Principal
P
1,000
1,000 1,000
i
n 1
1

Interest Rate
i
10%
10%
10%
t

HY
n
1
2
3 Here,
Here,NN==33
Times Discounting in a Year
t
2
2
2
Discount Factor
DF
0.9524 0.9070 0.8638
Present Value
PV=P*DF 952.38 907.03 863.84
2,723.25
Sum of Present Value

Types of Cash flows

Simple Cash flow


Annuities
Growing Annuities
Perpetuities
Growing Perpetuities

Simple Cash flow


Single Cash flow in a specified future time
period
Discounting: process by which a cash flow
is expected to occur in the future is
brought to its present value
Compounding: Is the process by which a
cash flow today is converted to its
expected future value

Annuities
Constant cash flow
occurring at
regular intervals of
time
An annuity can
1

occur at the end of


1 (1 r ) t
each period, as in APV C
r

this time line, or at

the beginning of
each period.

example
Outright Buy V/s Deferred Payment
Choice of Rs. 4,00,000 upfront or pay
90000 for five years
PV for 90,000 using earlier formula
3,24,430
Therefore choice.
When the present values of your
instalment payments exceed the cash
down price it is better to pay cash down
and acquire the asset.

Perpetuity and Annuity


Perpetuity Present Value
t
=> PVIF(r, ) = 1/r
=> APV = C/r
Annuity Future Value

(1 r ) t 1
AFV C

1
1 (1 r ) t
PVIFA( r , t )
r

Annuity present value interest factors


Interest rate

Number
of
periods

5%

10%

15%

20%

0.9524

0.9091

0.8696

0.8333

1.8594

1.7355

1.6257

1.5278

2.7232

2.4869

2.2832

2.1065

3.5460

3.1699

2.8550

2.5887

4.3295

3.7908

3.3522

2.9906

Examples: Annuity Present


Value
Annuity Present Value
Suppose you need 20,000 each year
for the next three years to make
your fees payments.
Assume you need the first 20,000
in exactly one year. Suppose you
can place your money in a savings
account yielding 8% compounded
annually. How much do you need to
have in the account today?

Examples: Annuity Present Value


(continued)
Annuity Present Value - Solution
Here we know the periodic cash flows are
20,000
each. Using the most basic
approach:
PV = 20,000/1.08 + 20,000/1.082 +
20,000/1.083
= 18,518.52 + 17,146.77 + 15,876.65
= 51,541.94
Heres a shortcut method for solving the problem
using the annuity present value factor:
PV =
20,000 [____________]/__________
= 20,000 x 2.577097
= ________________

Examples: Annuity Present Value (continued)

Annuity Present Value - Solution


Here we know the periodic cash flows are
20,000 each. Using the most basic
approach:
PV = 20,000/1.08 + 20,000/1.082 + 20,000/1.083
= 18,518.52 + 17,146.77 + 15,876.65
= 51,541.94

Heres a shortcut method for solving the


problem using the annuity present value
factor:
PV = 20,000 [1 - 1/(1.08)3]/.08
= 20,000 2.577097
= 51,541.94

Another problem

Suppose we expect to receive 1000 at the end of


each of the next 5 years. Our opportunity rate is 6%.
What is the value today of this set of cash flows?
PV
= 1000 {1 - 1/(1.06)5}/.06
= 1000 {1 - .74726}/.06
= 1000 4.212364
= 4212.36

Now suppose the cash flow is 1000 per year forever.


This is called a perpetuity. And the PV is easy to
calculate:
PV = C/r = 1000/.06 = 16,666.66
So, payments in years 6 thru have a total PV of
12,454.30!

Finding C
Example: Finding C

Q. You want to buy a motorcycle. It costs 25,000.


With a 10% down payment, the bank will loan you
the rest at 12% per year (1% per month) for 60
months. What will your monthly payment be?
A. You will borrow .90 25,000 = 22,500 . This is
the amount today, so its the present value. The rate
is 1%, and there are 60 periods:
22,500 = C {1 - (1/(1.01)
}/.01
= C
{1 - .55045}/.01
= C 44.955
C = 22,500/44.955
C = 500.50 per month

Finding t
Q. Suppose you owe 2000 on a
Visa card, and the interest rate
is 2% per month. If you make the
minimum monthly payments
of 50, how long will it take you to
pay off the debt? (Assume you
quit
charging immediately!)

A.

A long time:
2000 = 50 {1 - 1/(1.02)t}/.02
.80
= 1 - 1/1.02t
1.02t
= 5.0
t ln(1.02)
= 5.0
t
=
ln(5.0)/ln(1.02)
t
= 81.3 months, or about
6.78 years

(1 r )t 1
FVIFA(r , t )

Annuity future value interest factors


Numbe
r of
period
s

Interest rate
5%

10%

15%

20%

1.0000

1.0000

1.0000

1.0000

2.0500

2.1000

2.1500

2.2000

3.1525

3.3100

3.4725

3.6400

4.3101

4.6410

4.9934

5.3680

5.5256

6.1051

6.7424

7.4416

Examples for future value of


annuities

Q. Suppose you deposit 2000 each year for the next


three years into an account that pays 8%. How much
will you have in 3 years? Important: You make the first
deposit in exactly one year.

A. Using the most basic formula for FV:

FV = 2000 * 1.08__ + 2000 * 1.08__ + 2000


= 2332,80
+ 2160
+ 2000
= 6,492,80
Using the shortcut formula at the top of the page:
FV = 2000 * {___________} / 0.08
= 2000 * 3.2464
= 6492,80
(1 r ) t 1

FVIFA(r , t )

Example contd

Q. Suppose you deposit 2000 each year for the next three
years into an account that pays 8%. How much will you
have in 3 years? Important: You make the first deposit in
exactly one year.

A. Using the most basic formula for FV:

FV = 2000 * 1.08__ + 2000 * 1.08__ + 2000


= 2332,80
+ 2160
+ 2000
= 6,492,80
Using the shortcut formula at the top of the page:
FV = 2000 * {___________} / 0.08
= 2000 * 3.2464
= 6492,80

(1 r ) t 1
FVIFA(r , t )

Q. Suppose you deposit 2000 each year for the next three
years into an account that pays 8%. How much will you
have in 3 years? Important: You make the first deposit in
exactly one year.

A. Using the most basic formula for FV:

FV = 2000 * 1.082 + 2000 * 1.081 + 2000


= 2332,80
+ 2160
+ 2000
= 6,492,80
Using the shortcut formula at the top of the page:
t

(
1

r
)
1
FV = 2000 * {(1 + 0.08) - 1} / 0.08
FVIFA( r , t )

r
= 2000 * 3.2464

= 6492,80
3

Perpetuity
A perpetuity is a constant cash flow paid
(or received) at regular time intervals
forever.
Thus a lifetime pension can be considered
as a perpetuity or rentals received from
exploitation of land which is passed on
from generation to generation.
The present value of a perpetuity can be
written as C/r

Console Bond
A is a bond that has no maturity and pays
a fixed coupon (rate of interest).
Assume that you have a 6 per cent coupon
console bond. The original face value = Rs
1000. The current value of this bond if the
interest rate is 9 per cent is as follows.

Current value of Console Bond = Rs


60/0.09 = Rs 667
The value of a Console bond will be equal
to its face value only if the coupon rate is
equal to the interest rate. In this case Rs
1000, i.e. 60/0.06

Growing Annuity
A growing Annuity is a cash flow that is
expected to grow at a constant rate
forever
PV = C [1/(r-g) - (1/(r-g))*((1+g)/(1+r))t ],
Although a growing annuity and a growing
perpetuity share several features, the fact
that a growing perpetuity lasts forever
puts constraints on the growth rate. It has
to be less than the discount rate for the
formula to work.

Suppose you have just won the first prize


in a lottery. The lottery offers you two
possibilities for receiving your prize. The
first possibility is to receive a payment of
10,000 at the end of the year, and then,
for the next 15 years this payment will be
repeated, but it will grow at a rate of 5%.
The interest rate is 12% during the entire
period. The second possibility is to receive
1,00,000 right now. Which of the two
possibilities would you take?

C = 10,000
r = 0.12
g = 0.05
t = 16
PV = 10,000 [(1/0.07) (1/0.07)*(1.05/1.12)16] = $91,989.41
< $100,000, therefore, you would
prefer to be paid out right now.

Assume the same situation as in


Example I, but with the difference
that you can now make a choice
between receiving a payment of
10,000 at the end of year 1, which
will then grow at 5% per year, and be
paid out to you for the next 15 years.
Or, you can receive 85,000 right now.
What would you do?

We know from Example I that the present


value of the growing annuity is equal to
91,989.41. However, the annuity starts
only at the end of year 1, and hence, we
need to bring this value back one
additional period before we can compare it
to the 85,000 to received right now. Thus:
PV = 91,989.41 / (1.12) = 82,133.40 <
85,000, so we still prefer to be paid out
immediately.

Growing Perpetuity
A growing perpetuity is the same as
a regular perpetuity (C/r),but the
cash flow is growing (or declining)
each year.
A perpetuity has no limit to the
number of cash flows, it will go
indefinitely. The growing perpetuity
is in that way just the same as a
growing annuity with an extremely
large t.

PV = C / (r-g),
What would you be willing to pay
(given that you could live forever,
and hence could receive cash flows
for a share in the ABC Co., that
promises you to pay a cash dividend
to you at the end of the year of 25,
which will increase every year by 1%,
forever. The interest rate is fixed at
4.75%.

PV = 25 / (0.0475 - 0.01) = 666.67

Capital Budgeting
Every business has four basic decisions to
make:
Which projects to take? (Investment
decisions)
How to finance these projects? (Financing
decisions)
How much to return to investors?
(Dividend decisions)
How to manage working capital and its
components? (Liquidity decisions)

Net Present Value

Net Present Value means the difference between the PV of


Cash Inflows & Cash Outflows
How do you compute NPV?

Prepare Cashflow Chart


Net off Inflow & Outflow for each period separately

If Inflow > Outflow, positive cash


If Inflow < Outflow, negative cash

Find present values of Inflows & Outflows by applying


Discount Factor (or Present Value Factor)
NPV = (PV of Inflows) LESS (PV of Outflows); Result can be +ve
OR -ve
Continuing with our example of Bond Investment:

NPV

contd

If Cashflows are discounted at say 10%, the sum of PV is


25.05, a positive number

Description
Invested in 10% Bonds
Interest received
Interest received
New Bond Purchased from
Open Market
Interest received
Sold Bond in Open Market
How these values are arrived at?

Date
Amount In / Out
01-Jan-08
(1,000) Outflow
30-Jun-08
50
Inflow
31-Dec-08
50
Inflow
31-Dec-08
30-Jun-08
30-Jun-08

(1,020) Outflow
100
2,050

PV Outflow PV Inflow
(1,000.00)
47.62
45.35
(925.17)

Inflow
Inflow
Sum
(1,925.17)
Net Present Value

86.38
1,770.87
1,950.22
25.05

What is IRR?

NPV
If...

It means...

Then...

NPV > 0

the investment would


add value to the
firm

the project may be accepted

NPV < 0

the investment would


subtract value
from the firm

the project should be rejected

the investment would


neither gain nor
lose value for the
firm

We should be indifferent in
the decision whether to
accept or reject the
project. This project adds
no monetary value.
Decision should be based
on other criteria, e.g.IRR
etc.

NPV = 0

Internal Rate of Return (IRR)

Definition: The Rate at which the NPV is Zero. It can also be


termed as Effective Rate
If we want to find out IRR of the bond investment cashflow:

IRR

Contd

To prove that at IRR of 11.38% the NPV of Investment


Cashflow is zero, see the formula & table:
0

1000
11 .38 %
1

50
11 .38 %
1

970
11 .38 %
1

2150
11 .38 %
1

IRR contd
As an investment decision tool, the
calculated IRR should not be used to
rate mutually exclusive projects, but
only to decide whether a single
project is worth investing in.
Since IRR does not consider cost of
capital, it should not be used to
compare projects of different
duration

BOND VALUATION

Objectives
Distinguish bonds coupon rate,
current yield, yield to maturity
Find the market price of a bond given
its yield to maturity, find a bonds
yield given its price, and
demonstrate why prices and yields
may vary inversely
Why bonds Interest rate risk
Bond ratings and investors demand
for appropriate interest rates

Bond characteristics
Bond - evidence of debt issued by a body
corporate or Govt. In India, Govt
predominantly
A bond represents a loan made by investors to
the issuer. In return for his/her money, the
investor receives a legaI claim on future cash
flows of the borrower.
The issuer promises to:
Make regular coupon payments every period until the
bond matures, and
Pay the face/par/maturity value of the bond when it
matures

Elements of Bond
Bonds require coupon or interest payments
determined as part of the contract
Coupon payments represent interest on the
bond
Final interest payment and principal are paid
at specific date of maturity

face (par) value: amount paid to bondholder at


maturity

coupon payments: interest paid


maturity (or term): the end of life time of a
bond

Bond Concepts

Issuer: company, state or country


Coupon: fixed interest rate that issuer
pays to lender (investor)
Maturity date: date when borrower will
pay the lenders (investor) principal back
Bid price: price that someone is willing to
pay the lenders
Yield: indicates annual returnuntil the
bond matures

How do bonds work?

If a bond has five years to maturity, an Rs.80 annual


coupon, and a Rs.1000 face value, its cash flows would look
like this:

Time
0 1 2 3 4 5
Coupons
Rs.80 Rs.80 Rs.80 Rs.80 Rs.80
Face Value1000
Market Price Rs.____
How much is this bond worth? It depends on the level of
current market interest rates. If the going rate on bonds like
this one is 10%, then this bond has a market value of
Rs.924.18. Why?

Coupon payments

PV ( price ) of bond

Maturity Face value

80
80
80
80
80
1000

1 0.10 (1 0.10) 2 (1 0.10)3 (1 0.10) 4 (1 0.10) 5 (1 0.10) 5

Annuity component

General formula for a bond :


I
I
IF
PV


2
1 r (1 r )
(1 r ) n

Lump sum
component

Bond prices and Interest


Rates
Interest rate same as coupon rate
Bond sells for face value

Interest rate higher than coupon rate


Bond sells at a discount

Interest rate lower than coupon rate


Bond sells at a premium

Bond terminology
Yield to Maturity
Discount rate that makes present value
of bonds payments equal to its price

Current Yield
Annual coupon divided by the
current market price of the bond
Current yield = 80 / 924.18 =
8.66%

Rate of return
Rate of return
= Coupon income + price change
---------------------------------------Investment
e.g. you buy 6 % bond at 1010.77 and sell
next year at 1020
Rate of return = 60+9.33/1010.77 =
6.86%

Risks in Bonds
Interest rate risk
Short term v/s long term

Default risk
Default premium

Variations in Corporate
Bonds

Zero coupon bonds


Floating Rate bonds
Convertible bonds
Callable bonds

Bond pricing
The following statements about bond pricing are always
true.
Bond prices and market interest rates move in
opposite directions.
When a bonds coupon rate is (>=<) the markets
required return, the bonds market value will be
(>=<) its par value.
Given two bonds identical but for maturity, the price
of the longer-term bond will change more (in
percentage terms) than that of the shorter-term bond,
for a given change in market interest rates.
Given two bonds identical but for coupon, the price of
the lower-coupon bond will change more (in
percentage terms) than that of the higher-coupon
bond, for a given change in market interest rates.

Quick Quiz
1. Under what conditions will the coupon
rate, current yield, and yield to maturity
be the same?

A bonds coupon rate, current yield, and


yield-to-maturity be the same if and only if
the bond is selling at par.
2. What does it mean when someone says
a bond is selling at par? At a discount?
At a premium?

A par bond is selling for its face value


(typically 1000 for corporate bonds); the
price of a discount bond is less than par,
and the price of a premium bond is greater
than par.

SAMPLING

Objectives

Distinguish sample and population


Sampling distributions
Sampling procedures
Estimation data analysis and
interpretation
Testing of hypotheses one sample
data
Testing of hypotheses two sample
data

Population and Sample


Population

Sample

Definition

Collection of items being


considered

Part or portion of
population chosen for
study

Characteristics and
Symbols

Parameters
Population size = N
Population mean =
Population standard
deviation =

Statistics
Sample size = n
Sample mean = x
Sample standard deviation
=

Types of sampling
Non random or judgement
Random or probability
Biased sample

Methods of sampling
Sampling is the fundamental method of inferring
information about an entire population without
going to the trouble or expense of measuring
every member of the population. Developing the
proper sampling technique can greatly affect the
accuracy of your results.

Random sampling
Members of the population are
chosen in such a way that all have an
equal chance to be measured.
Other names for random sampling
include representative and
proportionate sampling because all
groups should be proportionately
represented.

Types of Random sampling


Simple random sampling
Systematic Sampling: Every kth member of the
population is sampled.
Stratified Sampling: The population is divided
into two or more strata and each subpopulation is
sampled (usually randomly).
Cluster Sampling: A population is divided into
clusters and a few of these (often randomly
selected) clusters are exhaustively sampled.
Stratified v/s cluster
Stratified when each group has small variation withn
itself but if there is wide variation between groups
Cluster when there is considerable variation within each
group but groups are similar to each other

Some concepts

Census
Clusters
Cluster sampling
Judgement sampling
Precision
Sampling fraction
Statistical inference Making
inference from samples

Sampling Distributions
Ex. If we take n no. of sample of 25
adults in a city with population of 10000
and we compute mean height and
standard deviation of that sample, mean
and SD for each sample would be
different.
A probability distribution of all possible
means of the samples is a distribution of
the sample means also called sample
distribution of the mean

Sampling Distributions
S No.

Population

Water in a river

A Team

Parts manufactured
in a process

Sample

Sample
Statistics

Sampling
Distribution

10 - one litre bottles

Mean no. of
parts of
mercury per
million parts
water

Sampling
distribution
of mean

Median Height

Sampling
distribution
of median

Proportion
defective

Sampling
distribution
of
proportion

Group of 5 players

50 of each part

Sampling from Normal


Populations
Sampling Distribution of the
mean

the probability distribution of


sample means, with all samples
having the same sample size n.
Standard error of mean for infinite
populations
x = n1/2

Standard Normal probability distribution

REGRESSION CORRELATION

Objectives
Relationship between two or more
variables
Scatter diagrams
Regression analysis
Method of least squares

Regression

Definition
Regression Equation

Regression

Definition
Regression Equation
Given a collection of paired data, the regression
equation

y = a+ bx
algebraically describes the relationship between the
two variables

Regression Line

(line of best fit or least-squares line)

the graph of the regression equation

The Regression Equation


x is the independent variable
(predictor variable)

y is the dependent variable


(response variable)

y = mx +b

Assumptions
1. We are investigating only linear
relationships.
2. For each x value, y is a random variable
having a normal (bell-shaped) distribution. All
of these y distributions have the same
variance. Also, for a given value of x, the
distribution of y-values has a mean that lies on
the regression line. (Results are not seriously
affected if departures from normal distributions
and equal variances are not too extreme.)

Correlation
Correlation exists between
two variables when one of
them is related to the other
in some way

Assumptions
1. The sample of paired data
(x,y) is a random sample.
2. The pairs of (x,y) data have
a
bivariate normal
distribution.

Scatter diagram
Scatterplot (or scatter
diagram)
is a graph in which the
paired (x,y) sample data
are plotted with a
horizontal x axis and a
vertical y axis. Each

Positive Linear Correlation


y

x
(a) Positive

x
(b) Strong
positive

(c) Perfect
positive

Negative Linear Correlation


y

x
(d) Negative

x
(e) Strong
negative

(f) Perfect
negative

No Linear Correlation
y

x
(g) No Correlation

(h) Nonlinear Correlation

Correlation Analysis
Statistical tool to describe the degree to
which one variable is linearly related to
another
Often used in conjunction with regression
analysis
Three measures
Coefficient of determination

For measuring extent or strength of association

Covariance

For direction and strength of the relationship

Coefficient of correlation

Dimensionless value showing extent and direction of


relationship

TIME SERIES

Objectives
Understanding four components of
time series
Compute seasonal indices
Regression based techniques

Time series
Group of data or statistical
information accumulated at regular
intervals

Variations in Time series


Secular trend

A persistent trend in a single direction. A market


movement over the long term which does not reflect
cyclical seasonal or technical factors.

Cyclical fluctuation

The term business cycle or economic cycle refers to


the fluctuations of economic activity (business
fluctuations) around its long-term growth trend. The
cycle involves shifts over time between periods of
relatively rapid growth of output (recovery and
prosperity), and periods of relative stagnation or decline
(contraction or recession).

Seasonal variation

Pattern of change within a year

Irregular variation

Unpredictable, changing in a random manner

Secular Trend

Cyclical Trend

Seasonal

Trend analysis
To describe historical patterns
Past trends will help us project future

LINEAR PROGRAMMING

Objectives
Understanding Linear programming
basics
Graphic and Simplex methods

Linear Programming
Mathematical technique used to
allocate limited resources among
competing demands in an optimal
way
E.g. resource and marketing
constraints
Certain Working capital requirements
Capacity constraints
Labour availability
Raw materials availability

Linear Programming
Problem formulation if
All equations are linear if 4 persons
produce 1 unit, for 3, 12 persons are
needed
Constraints are known and deterministic
probability of occurrence is taken as
1.0
Variables should have non negative
values
Decision values are also divisible

Types of LP problems
Maximisation - Profit
Minimisation - Costs
Transportation- to minimise cost of
shipping products and at the same time
maximise shipping m units to n
destinations
Decision making
For Sensitivity of results
Goal programming Objective function
Financial Budgeting

Simulation

Simulation
Studying effects of changes in real world
through models
Advantages:
Experiments can be conducted before real
system is operational, reduces costs
substantially
Appropriate to situations where size and
complexity of problem make use of techniques
difficult
Training needs
Sensitivity analysis

Simulation
Disadvantages:
Time consuming
Requires substantial computer
experience and expertise
Chances of overlooking seemingly
difficult scenarios
More art than science

Simulation Applications

Air traffic control queuing


Aircraft maintenance scheduling
Assembly line scheduling
Rail freight carriers
Facility layout
Flight simulators/Driving simulator

Simulation Methodology

Start
Define Problem
Construct simulation model
Specify values of parameters and variables
Run simulation
Evaluation of results
Propose new experiment
Stop

Simulation - Features
Model representative of system?
Time incrementing procedure fixed
time or variable

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