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How to gauge validity of business forecasts

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Fred Smith of the Dodge City Bank has received several loan applications from local small businesses. The applications are supported by various documentation, including the business plans of the firms. Each applicant has submitted forecasts of sales and profits for his or her business. Smith must decide which (if any) loans to approve. Because the ability of the firms to pay off the loans depends on the accuracy of the forecasts, he is especially concerned. He has called on you, his newly hired assistant, to help determine the reliability of the forecasts. What do you tell him about these forecasts and their accuracy to help him make his decision?

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Solution Summary

This solution suggest various forecasting methods in accessing business plans and sales forecasts made by loan applicants. Mean absolute deviation describes the reliability of the forecasts and gauge its acceptability.

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First, forecasts are good only as long as the data being projected are real/actual records of past transactions. Smith must closely look at the integrity of each proposal and the data used in the projection.
Second, Smith must look at the ...

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