Question

The one sure thing about financial projections is that they will be wrong—perhaps by only a little, or perhaps by a lot. But managers must still make decisions. In fact, making no decision is really a type of decision—a choice to do nothing.

How can you explain the uncertainties in financial projections without scaring your audience?

Answer 1

Introduction:

Given Question is related to taking capital budgeting decisions that involves high risk as such kind of projects are for long term, and future is uncertain, it involves huge investment, and once such decisions are made can`t be reversible in short span of time.

first, at the time of selecting projects following methods are used to confirm that weather this project will be profitable in future and generate enough revenues or not. using these methods future return related Risk can be minimized:

1. Accounting Rate of Return
2. Payback period
3. Net present value
4. Internal rate of return
5. profitability index

And there are other methods by which one can incorporate risk and uncertainty in capital budgeting decisions which are as follows:

1. Certainty Equivalent
2. Sensitivity analysis
3. risk premium approach
4. decision tree approach

Conclusion:

During financial projection at both the stages i.e. selection of project and at the time of thinking about uncertainty of all possible future crises that may occur or may not occur.

By using aforesaid methods for incorporating uncertainty in projects one can know in advance the best and worst scenario during planning and can be prepare in advance.

So, without afraid of uncertainty manager can make decisions and its better than taking no decision at all. Projections may go wrong but if all decisions are taken using perfect methods and insights risk and uncertainty can be reduced up to certain extend by advance planning.