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Cash Flow Modelling and Forecasting in Capital Budgeting Under Uncertainty *
Author(s) -
Giaccotto Carmelo
Publication year - 1990
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1990.tb01252.x
Subject(s) - cash flow , capital budgeting , net present value , terminal value , autoregressive model , econometrics , discounted cash flow , economics , cash flow forecasting , computer science , finance , microeconomics , production (economics) , project appraisal
The subject of this paper is modelling and forecasting of cash flows generated by a capital investment. The paper proposes the application of autoregressive, moving average, and mixed autoregressive moving‐average processes to capital budgeting. In addition, models for deterministic, stochastic and seasonal trends are considered. For each class of cash flows, analytical expressions are developed for the mean and variance of a project's net present value (NPV). Also considered are several equilibrium pricing models. For two of them, the forecasting methodology developed here is integrated into the pricing equation. Although the overall emphasis of the paper is on modelling and forecasting of cash flows, the implications for NPV pricing and risk analysis are also investigated. Several examples are used to illustrate the impact of particular cash flow models on the price and risk of a project.