1 . Concepts used in cash flow estimation and risk analysis

You can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation:

The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given.

Concept or Definition	Term
A computer-generated probability simulation of the most likely outcome, given a set of probable future events
The most likely scenario in a capital budgeting analysis
A measure of the projects effect on the firms earnings variability
The risk that is measured by the projects beta coefficient

Newcastle Coal Co. owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use the warehouse in a new project. Should Newcastle Coal Co. include the value of the warehouse as part of the initial investment in the new project?

No, because the company will still be able to sell the warehouse once the project is complete.

No, because the cost of the warehouse is a sunk cost.

Yes, because the firm could sell the warehouse if it didnt use it for the new project.

A large soft-drink company currently produces regular cola and diet cola. It is considering introducing a new soft drink that tastes like regular cola but has zero calories like the diet cola. The new zero-calorie drink that tastes like regular cola is most likely to produce externality.

Grade It Now

Save & Continue