chapter 292-

3 Pages

## 302. Values and Yields and Accounting Numbers," Journal rf Businesss Finance & Accounting (Autumn 1982), pp. 361-38l. Richard P. Brief, "Limitations of Using the Cash Recovery

The problem of predicting future cash flows is not dealt with explicitly in the derivation of the eRR method. Instead, the prediction model is embedded in the assumptions underlying the method. These assumptions imply that after year n when the steady state is reached, a firm's cash flows will grow indefinitely at a constant annual growth rate of pg as equation (2) shows. Since the eRR method was devised as a general method of estimating a firm's IRR, its usefulness depends on whether or not the environment reflects these assumptions thereby giving the prediction model in equation (2) external validity.