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Jim, who owns a small general store, decides to create a cash budget using only his...

Jim, who owns a small general store, decides to create a cash budget using only his pessimistic forecast of sales. Why is this not a good idea?

A. If his cash receipts are higher than projected, he could have used more cash to expand his business. His approach may lead to missed opportunities.

B. He may seek additional funding in anticipation of being short on cash. The unnecessary financing means he may give up more equity than needed or pay more interest expenses than needed.

C. Both A and B seem like good reasons that this is a bad idea.

D. Neither A nor B are good reasons to reject his idea. In fact, his idea is a good one.

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Answer #1

The answer is

C. Both A and B seem like good reasons that this is a bad idea.

Pessimistic approach means that he is forecasting the worst scenario and hence, the forecasted cash flows will be lower, while the actual results might be better

Hence, he will miss out on opportunities and could also end up paying more interest by financing extra due to his pessimistic approach.

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