how are cash flow projections determined? Are they accurate?

Expert Solution

Cash flow projections are made on the basis of historical data and the trends expected in future. These are based strongly on various assumptions made. We begin the cash flow projections by forecasting sales on the basis of historical growth rate. In estimation of sales, we also consider the projected demand for the company’s products in the coming years.

The cash expenses and outflows are also forecasted accordingly. Depreciation is an important component of cash flow projections and hence must be estimated carefully. This is based upon the method of applied by the company such as MACRS or straight line method. Tax rates are also estimated based on historical experience.

The cash flow projections are made on the basis of various assumptions and estimates and hence can be termed as a fair estimate of future cash flows. They cannot be accurate since there will be changes in actual demand, selling prices, costs and tax rates.

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