Corporate Finance
3a) This depends on the project. b) Better than the company or industry average, whichever is higher. C) Higher than the cost of capital. d) e) over 0.
The objection is based on speculation. Since we do not know what the future reinvestment rate is going to be, we must work with the best information we have today.
Again, the objection is the same. A complaint that we have less than perfect information when we are forecasting the future is absurd. We also do not know precisely what the future cash flows will be. We still need to make a decision, and that decision must therefore be made on the basis of the best information that we have today. The criticism has no validity.
Ch 9-1. Forecasting risk reflects the risk associated with forecasting...
There is more forecasting risk for a new product than for a cost-cutting proposal. This is because the new product deals with an unknown -- we do not have any past performance data on which to base our future projections, so there is greater risk of them being inaccurate. The projections for a cost-cutting measure will be based on current data to which adjustments have been made. With more information to assist in the forecast, the forecast for the cost-cutting proposal is going to be less risky. Moreover, forecasting risk for a new product incorporates external demand conditions; much of the forecasted change in a cost-cutting proposal is internal in nature.
2. Sensitivity analysis sees the numbers changed to reflect how sensitive the numbers are…
