Assessment 2: Reflective Journal Part A
Forecasts can also be termed as estimates and approximations and they are known to be perfect. As I have seen forecasting horizons can be made for a period of long duration that is for five years or more medium-term that is for more than one and to two years. Different kinds of forecasting can be made as per quantitative and qualitative methods. Quantitative methods can be described on the basis of experience, judgment and knowledge described guesses whereas qualitative methods are based on data, statistics, and systematic methods used to decrease risks.
Let’s see from an example we will see how NPV is calculated. A project is of an initial cost of $200,000 and it has a lifetime value of five years (Alwan, et al., 2015). There is no salvage. Depreciation is made as per a straight-line basis and needed return is 12% with an overall tax rate of 34%. Base case of NPV is found to be 15,567. Forecasting risk describes a range of sensitivity of NPV to changes in cash flow assessments and more sensitive it is to NPV the more range is found of forecasting risks. Greater the volatility is found in NPV as associated with a specific variable, greater is forecasting risk attached with that variable.
I can say from results that a majority of cases have positive NPV then project must be accepted without any hesitation. If any crucial variable is found that leads to negative NPV with a minute change in estimates then in such case project must not be accepted. Accounting break-even provides an indication to managers about how a project will affect accounting profit. In time series models higher values can place too much weight on a random variation of last duration.
It can be said by us that if any project cannot break even as per an accounting basis then it is not said to be a worthy project (Boardman & Hellowell, 2017). Also, capital rationing incurs when a firm or division has fewer resources. Time series models include working on time that can be years, date, hours, and minute’s data to find about hidden insights to make a useful decision making. Forecasting is made as we can say that it uses historical data to make useful estimates that are analytical in finding direction of futuristic trends. Working of simulation can only be seen only when any bad decision is to be made if no heed is paid on analysis of interaction among variables.
- Alwan, Z., Greenwood, D., and Gledson, B., 2015. Rapid LEED evaluation performed with BIM based sustainability analysis on a virtual construction project. Construction Innovation. Available at: http://nrl.northumbria.ac.uk/21550/1/BIM%20qatar%202018%20pure.pdf
- Boardman, A. and Hellowell, M., 2017. A comparative analysis and evaluation of specialist PPP units’ methodologies for conducting value for money appraisals. Journal of Comparative Policy Analysis: Research and Practice, 19(3), pp.191-206. Available at: http://www.research.ed.ac.uk/portal/files/25271294/Boardman_Hellowell_2016_JoCPA_comparative_analysis.pdf