Forecasting Errors in Capital Budgeting: A Multi-Firm Post-Audit Study

• Published in: The Engineering economist Vol. 52; no. 1; pp. 21 - 39
• Main Authors: Soares, João Oliveira, Coutinho, Maria Cristina, Martins, Carlos V.
• Format: Journal Article
• Language: English
• Published: Norcross Taylor & Francis Group 01-01-2007; Taylor & Francis Inc
• Subjects: Accounting; Accuracy; Auditing; Capital budgeting; Cash flow forecasting; Cluster analysis; Costs; Errors; Financial performance; Forecasting; Monte Carlo simulation; Population; Profitability; Return on assets; Sensitivity analysis; Statistical analysis; Studies; Subsidies; Technology adoption; Portugal
• ISSN: 0013-791X; 1547-2701
• DOI: 10.1080/00137910601159771

This is a post-audit study concerning the accuracy of capital budgeting procedures. It is based on the statistical analysis of the deviations occurring between effective and forecasted performance of companies after implementing their projected investments. The forecasts were collected from a large database of applications for investment incentives submitted for consideration to the Portuguese Governmental Agency IAPMEI during the 2nd European Union Framework Programme. The first conclusion of the study is the significance of negative forecasting errors of post-investment sales and their implication in terms of the expected profitability. In contrast, forecasts on future operating costs were quite accurate and errors on investment expenses revealed high volatility. Also interesting is the finding that there seems to be no relationship between the size, industry, region, or investment incentives and the pattern of the errors found.