Exponential smoothing is a forecasting method in which current and past values of a time series are used to predict future values of the series. The forecast is based on a weighted average of current and past values, with the recent values carrying more weight.

Example:

Using historical values for gross fixed assets from 2002 - 2004 and a smoothing constant (alpha) of .5, what is the predicted value for gross fixed assets in 2005?12/15/200412/15/200312/15/2002Gross Fixed Assets$5,800 $4,500 $6,000

Forecasting with exponential smoothing (alpha = .5):

Prediction for 12/2003 made in 12/2002 = $6000

Prediction for 12/2004 made in 12/2003 = .5 * $6000 + .5 * $4500 = $5250

Prediction for 12/2005 made in 12/2004 = .5 * $5250 + .5 * $5800 = $5525