Question

Assume that your company's last net cash flow equaled $53,000 and the last forecast for net cash flow was $65,000.

a) Given an alpha of 0.7, forecast the next cash flow using the exponential smoothing approach.
b) If your forecast for next month's cash flows is 87,500; the last forecasted cash flow was $75,000 and the last cash flow was $85,000, find alpha.

Answer 1

Using exponential smoothing with an alpha of 0.7, the next net cash flow is forecasted at $57,100. To find alpha given the mentioned forecasts and actual cash flow, the calculated value of alpha exceeds 1, which suggests there could be an error in the provided data or assumptions as alpha cannot exceed 1.

Step-by-step explanation:

To forecast the next net cash flow using the exponential smoothing approach, the formula is:
New Forecast = (Alpha * Actual) + ((1 - Alpha) * Old Forecast).
a) Using an alpha of 0.7, the forecast for the next cash flow is:
(0.7 * $53,000) + (0.3 * $65,000) = $57,100.

b) To find alpha given the forecast for next month's cash flows ($87,500), the last forecasted cash flow ($75,000), and the last actual cash flow ($85,000), we can use the formula where Actual = last cash flow and Old Forecast = last forecasted cash flow:
New Forecast = (Alpha * Actual) + ((1 - Alpha) * Old Forecast).
Solving for Alpha, we get:
Alpha = (New Forecast - Old Forecast) / (Actual - Old Forecast) = ($87,500 - $75,000) / ($85,000 - $75,000) = 1.25.
However, since alpha cannot be more than 1, there might be a mistake with the provided data or assumptions.