1
Ch 3: Forecasting:
Techniques and Routes
Introduction
Forecasting is the establishment of future
expectations by the analysis of past data,
or the formation of opinions.
Forecasting is an essential element of
capital budgeting.
Capital budgeting requires the commitment of
significant funds today in the hope of long
term benefits. The role of forecasting is the
estimation of these benefits.
2
Forecasting Techniques and
Routes
Technique
s
Routes
Top-down route
Bottom-up
route
Quantitative Qualitative
Simple
regressions
Multiple
regressions
Time trends
Moving averages
Delphi method
Nominal group
technique
Jury of executive
opinion
Scenario projection
3
Quantitative Forecasting
Quantitative: Regression with related variable
Data set of ‘Sales’ as related to both time
and the number of households.
YEAR
HOUSEHOLDS SALES
1991 815 2109
1992 927 2530
1993 1020 2287
1994 987 3194
1995 1213 3785
1996 1149 3372
1997 1027 3698
1998 1324 3908
1999 1400 3725
2000 1295 4129
2001 1348 4532
2002 1422 4487
HISTORICAL DATA
4
Quantitative Forecasting
Quantitative: Sales plotted related to households.
SalesUnits Related to Number of
Households
0
1000
2000
3000
4000
5000
0 500 1000 1500
Number of Households
Sales Unit
Sales
5
Quantitative Forecasting
Quantitative: Sales regressed on households.
Edited output from the Excel regression.
SUMMARY OUTPUT SALES REGRESSED AS A FUNCTION
OF HOUSEHOLDS
Regression Statistics
Multiple R 0.824389811
R Square 0.67961856
Adjusted R Square 0.644020623 <== "Strength" of the regression
Standard Error 429.2094572
Observations 11
Coefficients
t Stat P-value
Y Axis Intercept -348.218 913.798 -0.381 0.712
Number of Households 3.316 0.759 4.369 0.002