Chapter 7, Problem 1CQ

Forecasting Risk What is forecasting risk? In general, would the degree of forecasting risk be greater for a new product or a cost-culling proposal? Why?

Summary Introduction

To discuss: Forecasting risk and whether its degree is greater, considering new product or a cost-cutting proposals.

The possibility for occurrence of errors in the projected cash flows will lead to a poor or incorrect decision-making, which is termed as forecasting risk.

Explanation of Solution

Forecasting refers to the predetermined plan or decision for a particular process. It helps to predict the future happenings with the help of analyzing trends and past data. The forecasting process is prepared mainly to avoid uncertain future risks. This helps to take immediate action on any future happening of the events. Any errors in such processes will lead to a forecasting risk.

Forecasting risk mainly occurs on new products rather than cost-cutting proposals because the prediction of a new product’s cash flow is difficult when compared to cost-cutting proposals.