Projected versus Actual Cash Flows

There is a somewhat subtle point we need to make here. When we say something like "The projected cash flow in Year 4 is $700," what exactly do we mean? Does this mean that we think the cash flow will actually be $700? Not really. It could happen, of course, but we would be surprised to see it turn out exactly that way. The reason is that the $700 projection is based only on what we know today. Almost anything could happen between now and then to change that cash flow.

Loosely speaking, we really mean that, if we took all the possible cash flows that could occur in four years and averaged them, the result would be $700. So, we don't really expect a projected cash flow to be exactly right in any one case. What we do expect is that, if we evaluate a large number of projects, our projections will be right on average.

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