How challenging can it be for firms to develop the required future cash flows that are...

How challenging can it be for firms to develop the required future cash flows that are necessary for the inclusion in project valuation?

Expert Solution

It can be challenging for the companies to develop the required future cash flows that are necessary for inclusion in project evaluation because-

A. cash flows are exposed to various kinds of systematic risk and they cannot be properly estimated.

B. It is generally based upon the estimation of past trends resulting into future trends and these are not appropriate because past is never a reflection of the future.

C. Cash flows are highly volatile in nature and they are not always remaining the constant cash flows so it is not easy to determine its capital budgeting method

D .There can always be changes in the economic cycles and it could lead to do wild changes in the valuation of the cash flows so it is not easy to speculate them in advance

E. Changes in monetary policies are also leading to an optimum level of changes in the cash flows so they should always be discounted first.

So it can be overall summarised that due to the the volatile nature of the economy and uncontrollable factors present in the economy, it is not appropriate to project the accurate cash flows hence cash flow can only be estimated.

jeff jeffy answered 1 year ago

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