7. Calculating Economic Efficiency

The chapter begins with a discussion of ratios, which are essential for management activities, as they make planning, implementation and supervision easier. There are three types of ratio: classification figures, relationship figures and indexes. Not everything can be captured in numbers, which is where different kinds of performance indicators play a role. There are two main types of calculation methods used in capital budgeting—static and dynamic. Capital budgeting is involved in investment decisions. Cost comparison, profit comparison, profitability and payback calculations are examples of static calculations, while the present value method and internal rate of return method are dynamic calculations. Various tools are presented for optimisation, including linear programming. Forecasting is an essential business activity and tools such as time-series analysis and regression analysis are described.