Problems in Cash Flow Estimation - Financial Management

Because project cash flows occur in the future, there are varying degrees of uncertainty about the value of these flows. Therefore, it is difficult to predict the actual cash flows of a project. The capital budgeting process assumes that the decision maker is able to estimate cash flows accurately enough that these estimates can be used in project evaluation and selection. For this assumption to be realistic, a project proposal should be based on inputs from marketing managers regarding revenue estimates and inputs from the production and engineering staffs regarding costs and achievable levels of performance.

Objective inputs from these sources can help reduce the uncertainty associated with cash flow estimation. In addition, cash flow estimates for different projects may have varying degrees of uncertainty. For example, the returns from asset replacement projects are generally easier to forecast than the returns from new product introductio projects.

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Financial Management Topics