Question

Specifically how are the problems with estimating the future cash flows of a corporation different from estimating the future cash flows of a capital budgeting project?

Answer 1

Problems with estimation of future cash flow of corporation is different from estimation of cash flows of a capital budgeting project because capital budgeting product will be having a specific factors associated with it whereas corporation is operating on a large scale and it has multiple divisions and they have different cost of capital associated with the division so so they will be having a highly complex scenario in determination of the overall cost of capital of the corporation because it is getting affected a lot by the Macro events.whereas

A specific project is undertaken after ascertainment of the cash flows and these cash flows are almost accurately analysed but when we are estimating the overall cost of capital of the entire organisation and the growth rate associated with the entire organisation it is not easy task because the organisation is operating through multiple division in multiple countries and they will be having different type of risk associated with their operations so it can be said that there is a high level of complexity and a very high risk of projection of wrong estimates so there will be larger macro risk associated with the total operation of the whole business organisation.

Cash flows associated with the specific project will be having a low level of uncertainty associated with it and a low level of fluctuation as well because it can be accurately estimated whereas organisational overall cash flows cannot be easily estimated because it is having a high rate of uncertainty and it is also operating on a larger scale so there will be a wide range of variations