Question

The possibility that incorrect decisions are made due to errors in projected cash flows is called...

The possibility that incorrect decisions are made due to errors in projected cash flows is called ________.

Multiple Choice

  • Operating risk.

  • Type I error.

  • Transactional risk.

  • Systemic risk.

  • Estimation risk.

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Answer #1

Answer : Estimation risk

Estimation risk is the possibility that errors in projected cash flows will lead to incorrect decisions OR  it is the possibility that it will lead to bad decision because of errors in the projected cash flows.

Now if cash flows are not correctly estimated, will lead to wrong decisions by finance manager, may lead to firm in bad position in future provided we assume that cash flows were estimated were on higher side.

Operating risk is associated with operational aspects of business for which we find DOL, so it is not correct answer

Type I error is one which takes place when a good project is rejected, so it is not the answer

Transactional risk is associated with export or import transactions.

systematic risk is beta, so no other answer is correct.

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