The short section in the book describes some methods of measuring Return on Investment (ROI) as part of a financial decision making process. Effective financial decision making requires an understanding of the accounting statements, cash flow timing, basic tax policy, the time value of money, and risk. Applying the various capital budgeting tools discussed in this module is actually the easy part of financial management; the hard part is forecasting the cash flows. The power points provide a brief synopsis of the capital budgeting process of evaluating the ROI of long-term investments like Amazon’s acquisition of Whole Food
Recognizing that we will look more in depth at risk and time value of money metrics in the future, this discussion is meant to bring out some of the practical problems with forecasting.
Group A: Estimating cash flows is the hardest aspect of capital budgeting. The various capital budgeting tools are based on reasonably accurate estimates of those cash flows, and predicting the future is inherently difficult. In your opinion, how can a company like Amazon increase the accuracy of its cash flow forecasting for all of the new projects it has taken on (or plans to take on) such as drone delivery, entering the pharmaceuticals business, or operating Whole Foods Markets?
Answer & Explanation
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