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

The owner of Cafe Bakka is considering investing in new point-of-sale technology. He spent $10,000 on his current point-of-sale system five years ago. The new point-of-sale technology will cost $25,000, but it will dramatically improve the speed at which his counter staff will be able to take orders; it will also reduce the owners administrative work. How should the owner account for the cost of the current point-of-sale technology when performing his capital budgeting analysis to determine whether or not to purchase the new point-of-sale technology?

He should include the cost of the current point-of-sale system as part of the cost of the new point-of-sale system.

He should include half of the cost of the current point-of-sale system when evaluating the cost of the new point-of-sale system.

He should ignore the cost of the current point-of-sale system when evaluating the cost of the new point-of-sale system.

A paper manufacturer has built a plant that meets all government-mandated environmental regulations, but the plant still produces an unpleasant odor when it is being operated. Many residents in the area dislike the paper mill because of these unpleasant odors. This is an example of _________ externality.