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.

jeff jeffy answered 4 months ago

For a company, the cash flow from assests (or free cash flow) projections for the next...

For a company, the cash flow from assests (or free cash flow) projections for the next three years are as follows. After year 3, the company will continue growing at a constant rate of 1.5%. the firm's tax rate is 3% and will maintain a debt-equity ratio of 0.50. the risk-free rate is 3%, the expected market risk premium over the risk free rate is 6%, and the company's equity beta is 1.50. The company's pre-tax cost of debt is...

Below are a target's free cash flow projections and it's projections of interest expense from debt....

Below are a target's free cash flow projections and it's projections of interest expense from debt. The target's expect constant growth rate is 6%. It's unlevered cost of capital is 11.56%. The tax rate is 40%. Use this information to calculate 1) The unlevered value of the target 2) the value of the tax savings from interest expense and 3) the value of the target's operations. tax rate 0.4 unlevered cost of capital 0.1156 constant growth rate for terminal cash...

QUESTION 14 The following table presents the initial cash outlay and cash flow projections for a...

QUESTION 14 The following table presents the initial cash outlay and cash flow projections for a new line of digital cameras that DigiCam is evaluating: Year Cash inflow / outflow Amount of cash flow 0 Initial cash outlay for buying plant and equipment (at the beginning of Year 1) $2,350,000 1 Net operating pretax cash inflows $1,000,000 2 Net operating pretax cash inflows $1,200,000 3 Net operating pretax cash inflows $1,300,000 3 Salvage value (at the end of Year 3)...

A project’s total (or net) cash flow will decrease when the ____________________. A) sales projections are...

A project’s total (or net) cash flow will decrease when the ____________________. A) sales projections are higher B) net working capital requirement decreases C) variable costs decrease D) depreciation expense decreases

Cash flow projections are a central component to the analysis of new investment ideas. In most...

Cash flow projections are a central component to the analysis of new investment ideas. In most firms, the person responsible for making these projections is not the same person who generated the investment idea in the first place. Why?

Given the following cash flow projections and a required rate of return of 14%, find the...

Given the following cash flow projections and a required rate of return of 14%, find the NPV, IRR. Should you accept this project? Does the project add value for the shareholders? Year Cash flow 0 -$3,000,000 1 $420,000 2 $600,000 3 $800,000 4 $1,000,000 5 $1,200,000 6 $800,000 7 $650,000 8 $500,000 9 -$450,000

Electronic Innovations Limited is considering two separate projects A and B. The cash flow projections for...

Electronic Innovations Limited is considering two separate projects A and B. The cash flow projections for each year are as follows: YEARS 0 1 2 3 4 PROJECT A -$62,000 28,000 24,800 29,600 20,800 PROJECT B -$120,000 48,000 47,000 46,000 45,000 The required return is 12% for both projects and they are mutually exclusive projects. a. Calculate the payback periods. Which project would you choose if you apply the payback period criterion? b. What is the profitability index (PI) for...

1) You’re discounting the cash flow projections of a new project (a capital investment). You use...

1) You’re discounting the cash flow projections of a new project (a capital investment). You use your WACC. The result is a positive Net Present Value. Next you compute the IRR of the project using the same cash flows. Assuming you didn’t make an error in your computations, is it possible that the IRR you calculated could, under certain circumstances, be less than your WACC? Yes No 2) The reason Working Capital is shown as a cash inflow in the...

The current worth of a future cash flow can be determined for a given rate of...

The current worth of a future cash flow can be determined for a given rate of return by calculating the present value of the cash flow involved.

Why is a cash flow statement considered an accurate indicator to evaluate a company? Locate financial...

Why is a cash flow statement considered an accurate indicator to evaluate a company? Locate financial statements for a company of your choice, and review the cash flow statement. What insights does it provides about the company’s performance, in relation to other its other financial statements?

Question