Cost of Prediction Error-Capital Investments (20.4): Fun Fads, Inc., invests in high-technology, short useful life projects. Two
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Cost of Prediction Error-Capital Investments (20.4): Fun Fads, Inc., invests in high-technology, short useful life projects. Two years ago, the company evaluated a product with an investment cost of $1.5 million and expected cash flows of $1 million per year for three years. The company's cost of capital is 18 percent. The product did not perform as well as expected. The company knows that the cash flows in Years 1 and 2 were $700,000 and the expected cash flow in Year 3 is $400.000.
Required: What is the cost of prediction error?
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