Capital Budgeting: Forecasting The Future

Capital resource budgeting is the way managers of publicly held companies fulfill their fiduciary responsibility to maximize the wealth of stockholders. Managers maximize shareholder wealth by allocating investment capital to the most productive of competing alternative projects. Managers do this in a manner that maximizes the net present value of the firm's future cash flow. The techniques of cash flow analysis are the primary tools available for selecting a corporate portfolio of projects that meets or exceeds the rate of return expected by shareholders. The reliability of cash flow analysis hinges on the ability of managers to forecast the future values of individual components of cash flow. The accuracy and reliabil¬ity of forecasting determine the soundness of capital investment decisions and, ultimately, determine the value of the firm.