After reading the Ethical Issues box on page 330 of the required text, devise a plan that will minimize or reduce the impact of these cash flow estimation biases on effective decision-making.

3 Part The Capital Decision ETHICAL ISSUES Cash Flow Estimation Biases The estimation of the cash flows ined with an Investment project is the most important in the capital expenditure evaluation process the cash flow estimates cited with a project are non tionally or unintentionally biased, afirm's resources are unlikely to be located to the set of investment pojects that will mame shared wealth There are several reasons why managers might produce biased cash flow estimates when preparing capital expenditure project proposals. Firsta manager might be tempted to overestimate the revenues or underestimate the costs associated with a project the manager is atempting to expand the resource base over which he or she has control By biasing the estimates of a project's cash flows upward, a manager is likely to receive a larger share of the Westment resources of the firm. Because managerial compensa tion is sometimes to the span of job responsibili ties, managers may be tempted to expand the span of control of the expense of other areas in the form. Second, some formate employee compensation to performance relative to stated objective compen sain scheme o n le managed by Ha manager is confident that the best emate of the cash Sows from a proposed project is sufficiently forgeto guarantee project acceptance, the manager may be tempted to reduce these cash low estimates to a level below the mostly outcome level con fident that the project will continue to be viewed as an acceptable investment and that it will be funded. How ever, once the project is under way, the project man or will feel less pressure to meet projected performance Mandards. The downward bias in the cash flow estimates provides a cushion that permits stoptimal management of the project while achie in the objectives enunciated when the project was first proposed What impact does intentionally blasing cash flow estimates for investment projects have an achieving the goal of shareholder w ith a c tion? the success of the firm. A survey support this conclusion and provides considera e insight regarding the cash flow estimation procedures wed by larger firms For 500 The majority of the firms responding to the survey a capital budget of more than 100 million. Nearly 67 percent of the forma prepared formal cash flowest mates for over percent of their annual capital and majority produced detailed cash flow projections for capital investments requiring an initial outlay of S60,000 or more Firms with high capital intensity and high leverage were more likely to have more such as a financial analyser e controlerodeput ment manager designated to over the process of flowestimation. This reflects the large number of projects avecated with capital intensive forms and the need to flectively manage the risk ass with th e When asked about the type of cash flow estimate that were 56 percent indicated that they used single-dollar estimates percent wed a range of estimates and percent used both single-dollar estimates and a range of estimates. There was a Significant positive correlation w ins that we both types of time and wars of operating and financial sugesting that the o range of estimates e procedure for managing high risk Forecasting methods employed by the repondent firms included subjective estimates from management sensitivity analysis con s analysis of expert opinions and com pu l ation. Many farms we make cash cow forecasting chiques. The long the forecasting her that is the lower the con le of the pa t he more likely a form is to use mulle methods for forecasting future cash flow