I need to reply to a fellow students post. I am not sure why to say to them. I h
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I need to reply to a fellow students post. I am not sure why to say to them. I have a reference to.
View Topic View Thread Settings Help Search Modulel 6 Disc Q Discussions List | Module! 6 Discussion Subscribe Adam Ledbetter posted Nov 23, 2017 1033 AM 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? The reason the person respons sible for making the projections is not the same person who generated the investment idea is to remove any bias from making future cash flow projections. A desire to make a possible investment look worthwhile can often make cash flow projections inaccurate, which can possibly I impede the firms ability to repay any loan obligations that were taken out for the investment as well as other debt on hand ore viable option than t were presented by the person who origina y had the idea present the investment will help the investment be perceived as a m "To evaluate investment opportunities financial managers must determine the relevant cash flow s associated w h the pro et ·.ncrementa cash out ws (investment) and inflows (return) The cash flows of any project ma may be inflows or outflowrs) and (3, terminal cash fow Al pojects-whether for expansion, replacement or renewal or some other purpose -have the first two components Some, however, lack the final component, terminal cash flow." (Gitman Furthermore. . Timaly operational expenditures such as meeting payfoll requirements, would be one reason for cash-low financing Companies are essentially barrowing from cash flows they expect to receive in the future by giving another company the rights to an agreed portion of their recoverables. This allows companies to oblain financing today, rather than at some point in the future (Smith, Lisa) 26 July 2011, www.investopedia.com/articles/financial theory/11/cash-flows-from- Smith, Lisa "Cash Flow From Investing investopedia investing aspflixzz4zGeF06tw Gitman, Lawrence J. Principles of managerial finance 14th ed, 2010 J Prinoiples of managerial finance 14th ed, 2010 Reply to Thread Show Threaded Finer by All Posts· Clear filters Robert Watson Fri at 1.51 PM Adam, your points about unethical behaviors resulting in cash flow deception were well done Of course, in finance the key Even smart and energetic employees are worthless if they are dishonest ReplyExplanation / Answer
There is a posisbility that a person generating an investment idea is very optimistic about his/ her idea and subconsciously ignore the risk factors and uncertainties in cash flow projections. The inconsistencies that might crop up are with respect to:
1.) Discount Factor: Certain risk factors like liquidity risks, macro economic risks, interest rate risks might be ignored and the discount factor selected for discounting might be closer to risk free rate. This will lead to overshooting of future cash flows and thus increasing the NPV giving false impression of profitable investment.
2.) Cash Flows: The cash flows projected might not be correct and on higher side. Person with investment idea might forsee no issues in incoming cashflows. Counterparty from whom payment is expected might be wringly persumed as trustworthy. Other wrong assumptions of cash flows projected higher are, on time payments everytime, wrong projections of market demand.
Note: Above mentioned points are few of the reasons why a person with investment idea may go worng while evaluating the profitability. In summary there is a high probability that he may have a sub consious bias to overlook the risk invilved and prove his investment idea as profitable.
It is better for firm to keep the two roles of generating investment ideas and evaluating profitability separate.