Capital Budgeting: Forecasting The Future (PriPrint 97-118)

Capital resource budgeting is the means by which 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 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. The accuracy and reliability of forecasting determine the soundness of capital investment decisions and, ultimately, determine the value of the firm. The present paper will explore tools for forecasting the spot market price of a commodity, silver, to demonstrate the difficulty and uncertainty involved in forecasting the future. The commodity price is only one of a number of components of the cash flow equation. Each component has a unique and uncertain future and must be individually analyzed and forecast to arrive at a robust cash flow model.