43.3
3.List two potential problems (similar to the concern that
managers' forecasts may be over-optimistic) in considering
capital budgeting recommendations. (3)
Inconsistent forecasts: Are the assumptions that underlie the forecasts of revenues and costs consistent? Are assumptions used to derive the discount rate consistent with the assumptions used to forecast cash flows?
Incentive (or agency) problems: Do managers have incentives to maximize firm value? Do managers have incentives to consider the effects of investments on other parts of the firm?
Behavioral biases: Do managers suffer from over-optimism?
Lack of economic reasoning: What is the source of a positive NPV? What is the competitive advantage? How long will the competitive advantage last?