Capital budgeting analysis not only requires the evaluation of cash flows but also requires the understanding of the origin of those cash flows. Based on your understanding of cash flows in a firm, answer the following questions:

The present value of ______ can be used to determine the basis of a firms value. (accounting income/cash flows)

Ideally, capital budgeting analysis should take cash flows into account _______ . (monthly basis, annual basis, exactly when they occur)

Understanding the nature of projects

Capital budgeting analysis often involves decisions related to expansion projects and/or replacement projects. Based on your understanding of expansion and replacement projects, answer the following:

A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered?

An expansion project

A replacement project

What are sunk costs?

Sunk costs are ______ in the capital budgeting analysis. (relevant/not relevant)

The role of externalities

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. (a negative within firm, an environmental, a positive within firm)