1. Jack apparently spends much time and effort trying to obtain accurate cash flow forecasts. Is Jack's concern about attention to these estimates justified? Explain.
2. Any capital budgeting decision involves estimating future cash flows. Financial theory suggests that we want these estimates to be 'unbiased. That is, we want forecasts that are just as likely to be above as below the actual cash flow. Thus, given numerous 'unbiased' estimates, on average the cash flow forecasts will equal the actual cash flows.
a. It does not appear that North's executives generate 'unbiased' forecasts since a post-audit concluded that on average the predicted cash flows were less than the actual cash flows. Are you surprised by the result of the post-audit? Explain.
b. Suppose that a firm's estimate is consistently too low, i.e. on average the predicted cash flows are below the actual cash flows. What difficulties, if any, would this create?
3. What do you like and dislike about Jack's capital budgeting procedures and why?
4. Which, if any, of the two presses would you recommend that Jack buys and why?
5. What suggestions would you give Jack regarding his capital budgeting procedures? Make sure that each suggestion is appropriately justified.