Introduction to Finance

depreciation tax shield 
tax 
reduction due to depreciation of 
fi xed assets; equals the amount of 
the depreciation expense multiplied 
by the fi rm’s tax rate, shown as (
T 
)
(Depreciation)
22
Joseph Spiers, “The Most Important Economic Event of the Decade,” 
Fortune
, (April 3, 1995), pp. 33–40.

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17.11 Risk-Related Considerations
547
underestimate completion times—even in the face of past experience. Better and more com-
plete data, from diff erent sources, is needed to get more objective and fair estimates.
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The control or post-audit phase sometimes requires the fi rm to consider terminating or 
abandoning an approved project. The possibility of abandoning an investment prior to the 
end of its estimated useful or economic life expands the options available to management and 
reduces the risk associated with a poor decision. This form of contingency planning gives 
decision makers a second chance when dealing with the economic and political uncertainties 
of the future.
In a survey, researchers found that three-fourths of responding Fortune 500 fi rms audited 
their cash fl ow estimates.
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Nearly all of the fi rms that performed audits compared initial 
investment outlay estimates with actual costs. All evaluated operating cash fl ow estimates, and 
two-thirds audited salvage value estimates.
About two-thirds of fi rms that performed audits claimed that initial investment outlay estim-
ates usually were within 10 percent of forecasts. Only 43 percent of fi rms that performed audits 
could make the same claim with respect to operating cash fl ows. Over 30 percent of the fi rms 
confessed that operating cash fl ow estimates diff ered from performance by 16 percent or more.
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To be successful, the cash fl ow estimation process requires a commitment by the corpora-
tion and its top policy-setting managers; this commitment includes a management information 
system the fi rm uses to support the estimation process. Past experience in estimating cash 
fl ows, requiring cash fl ow estimates for all projects, and maintaining systematic approaches to 
cash fl ow estimation appear to help fi rms achieve success in forecasting cash fl ows.
In volatile economic environments, such as the fi rst decade of the 21st century, business 
professional know that historical averages and point estimates are likely to be incorrect. The 
business environment is complex and is aff ected, as we saw in 2007–2009, by factors beyond 
a manager’s control. 
Chapter 12 introduced the concept of scenario analysis as a means of gauging outcomes 
in an uncertain future. More professionals at all levels of business have realized the value of 
playing “what if” scenarios and creating plans for what should be done if certain economic 
and business events occur.
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