Question

What is a "forecasting error" and why is it important to the analysis of capital expenditure projects?

Answer 1

Forecasting error means the error of deviation between the standard and the actual because the prediction of standard has not been able to meet with the actual performance.

This will mean that the future cannot be accurately predicted and it can lead to forecasting errors.

Capital budgeting decision needs a lot of forecasting because it is dependent upon futuristic cash flows of a project in order to decide whether to accept a project or not, so wrong forecasting can lead to acceptability of a bad project by the company and it can mean that the company will suffer in the long run and it can also mean that the company will skip the good projects so the company will not be able to maximize the profits.

It is very important for analysis of capital expenditure decisions because a good forecasting will mean that better projects are selected in the long run to maximize the profit