Answer to Question #229009 in Finance for HMO

Question

Tigers Ltd. sells tiger related paraphernalia and has been in operation since 2011.

The company is trying to estimate its future sales. Its past sales were as follows:

(All values in R millions)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

5 7 9 10 11 15 16 23 22 21

The company hired a business consultant who performed a regression analysis to

estimate its future sales which yielded the following equation:

Y = 2.1x + 2.5 (R^2 = 0.93)

The consultant indicated that replacing 11 into the equation should yield the next

year’s sales estimate, 12 for the year thereafter and so on. The estimate for 2021

is R25.6 million.

One of the larger store managers indicated that they feel that it is overoptimistic

as his store sales’ has been flat over the past two years.

Required:

Briefly advise the management of Tigers Ltd. on the objective forecasting

technique used and argue who is correct in this case (support your argument with

facts from the question and theory).

Answer 1

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