. 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
An example of externality that can have a negative effect on a firm
The cash flow at the end of the life of the project
Creates value for a company because it gives the company the right but not the obligation to take future action to increase its cash flows
The risk of a project without factoring in the impact of diversification
A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed

Acme Manufacturing 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 Acme Manufacturing 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.

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

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

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.