Question

Carefully explain the process as it relates to projecting the expected cash flows associated with a capital budgeting project.

Answer 1

Cash flow forecasting is a method of forecasting of a stream of cash flow related to business. it is helpful in deciding up on various kinds of decision making process related to capital budgeting decisions like whether to accept a project or not.

It can be done through three step process which could be as follows-

1. Projection of the likely sales figure-a company should always estimate the likely sales figure in the coming months or years based upon the past performance of the company and the growth trajectory must be also discounted in order to arrive at a better future projection of sales.

2. Projected payment ttimings-A company should estimate the timings associated with cash flow receipt as it is needed in order to discount them according to their time of receipt so it is very important to time when those cash flow will be available to the company

3 . Projected cost estimation-after the company is done with projection of the future sales and the projection of the payment timings, one should be projecting the related cost associated with a project and hence it will include the cost related to to fixed expenses like rent and depreciation and cost related to variable expenses which would differ based upon firms nature.

so after estimation of these figures, the firm can likely arrive at net present value of the cash flows as well as it can decide upon various tools used in capital budgeting decisions regarding with cash flow like net present value method, payback period method, internal rate of return method.