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When the financial executive estimates the cash flows of a project for a capital budgeting analysis,...

When the financial executive estimates the cash flows of a project for a capital budgeting analysis, there is a degree of uncertainty surrounding the estimates. In this context, which of the following statements is true? a) Recognizing the uncertainty surrounding the estimates, the financial executive should use the most pessimistic figures. b) Since financial executives cannot influence certain external factors, they do not have to understand how these external factors can affect the estimates. c) One way the financial executive can gain a sense of the uncertainty associated with various cash flows is to chart a probability distribution of possible outcomes. d) The use of scenario analysis can assist in developing cash flow estimates that are more certain or accurate.

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Answer #1

Answer: (c) One way the financial executive can gain a sense of the uncertainty associated with various cash flows is to chart a probability distribution of possible outcomes.

This way the financial executive can gauge the extent of risk that he is going to take.

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