An ad hoc approach: this approach requires reducing the estimated present value. Shareholder wealth can however increase using this approach if done correctly. (b)An Options-based Approach: this approach is an application of certainty equivalents. Any certainty equivalent approach yield unbiased estimates of project values. C)Analytical expectation and numerically evaluated expectations: An unbiased estimate of a project can be done by dividing the estimated IV of each cash flow by a correction factor. This is the ratio of expected value of the estimated Photo the true value. A general correction factor can be determined for any sampling distribution with an analytical expectation. (d)Unbiased estimation of IV:An analytical approximation to an unbiased estimator of the discount factor can be derived for any sampling distribution.
This method and the analytical expectation and numerically evaluated expectations both eliminate IV bias although the analytical approach is more difficult to apply. This approach will be preferred by manager who are less sure of the properties of the sampling distribution of the RADAR because it requires less knowledge of the sampling distribution. In conclusion neither the textbook literature nor the empirical survey liberation addresses the issue of capital budgeting with estimation risk In RADAR.
In the process of ignoring estimation risk In the RADAR, overvaluation of project cash flows occurs. This provides additional explanation to the observation that managers reduce estimates prior to making capital budgeting decisions. Several methods of reducing the bias arising from estimation risk In the RADAR were talked about which Include the fact that decision makers behave In a way consistent with assumptions that they wish to reduce bias.
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However the extent of estimation of risk caused by blabs managers face In actual practice Is not known yet, and because of this an Important next step should be an empirical test to access the magnitude of the blabs and differentiate among existing theoretical explanations for the biased IV estimates. Criticism of Management Accounting By addressing literature which focuses on estimation risk. (l)Estimation risk and biased present estimation problem when estimating the true discount rate because the decision maker does not know the RADAR. (b)Biases in present value estimates: this explains estimate of any project's IV to be biased. C)illustration of the magnitude of the bias: Some limitations must be placed on the distribution of the estimate of the RADAR to assess the extent of the bias. We are made to understand that the bias grows with the project life. (II)Correcting for the estimation risk induced bias: there are various unbiased estimate of a project can be done by dividing the estimated Poof each cash flow by a correction factor. This is the ratio of expected value of the estimated IV to liberation addresses the issue of capital budgeting with estimation risk in RADAR.
In the process of ignoring estimation risk in the RADAR, overvaluation of project cash reduce estimates prior to making capital budgeting decisions. Several methods of reducing the bias arising from estimation risk in the RADAR were talked about which include the fact that decision makers behave in a way consistent with assumptions that they wish to reduce bias.
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