Question

You are forecasting cash flows using regression analysis (sales is the independent variable). After estimating the...

You are forecasting cash flows using regression analysis (sales is the independent variable). After estimating the regression model, you have recorded the following regression equation:
Net Cash Flow = $27,000 + (0.7*Sales). Use this model to:

  1. Forecast net cash flow, assuming the next month’s Sales will equal to $150,000
  2. Evaluate your forecast from part (a), assuming that month has passed, in which the actual net cash flow was $145,000
  3. Determine the impact of an additional $1 in sales on net cash flow.
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Answer #1

a. Net Cash Flow = $27,000 + (0.7*Sales)

Sales = $ 150,000

Net Cash Flow = $27,000 + ( 0.7 * $150,000 )

Net Cash Flow = $27,000 + $105,000

Net Cash Flow = $132,000

b. Net Cash Flow = $27,000 + (0.7*Sales)

$145,000 = $27,000 + (0.7*Sales)

$145,000 - $27,000 = (0.7*Sales)

(0.7*Sales) = $118,000

Sales = $118,000 / 0.7

Sales = $ 168,571.43

c. Net Cash Flow = $27,000 + (0.7*Sales)

Assume Sales be $1

Net Cash Flow = $27,000 + ( 0.7 * $1 )

Net Cash Flow = $27,000 + $0.7

Net Cash Flow = $27,000.7

Which means a additional sale of every dollar will increase net cash flow by 70 cents (or $0.7)

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