Question

What is usually the largest forecasted cash flow of a capital budgeting analysis? Why

Answer 1

Of the 3 types of Cash Flow , Operating Cash flow is usually the largest forecasted cash flow. Lets see the reasons:

In case of Investment cash flow and financing cash flow, we usualy know how the project is going to be funded (ie debt or equity and source of the funding too, of whether it is internal or external sources of funding). In case of investment cash flow we usually link the Capital expedniture to the dependent Operating Cash Flow.

Which now brings us to Operaitn gCash flow projection and here is where we have a long list of assumptions in terms of what will be the revneue of the project, costs associated with the project, working capital including receivbales, payables and inventory of the project. Porobable marginal tax rate applicable on the project. Hence maximum amount of research and projection will go into determining these factors of the Operating Cash flow and hence will become the largest forecasted cash flow.