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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
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.
Concpt or Definition
Term
A computergenerated 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 project's effect on the firm's earnings variability
The risk that is measured by the project's beta coefficient
The owner of Caf Bakka is considering investing in new pointofsale technology. He spent $ on his current pointofsale system five years ago. The new pointofsale technology will cost $ but it will dramatically improve the speed at which his counter staff will be able to take orders; it will also reduce the owner's administrative work. How should the owner account for the cost of the current pointofsale technology when performing his capital budgeting analysis to determine whether or not to purchase the new pointofsale technology?
He should include half of the cost of the current pointofsale system when evaluating the cost of the new pointofsale system.
He should include the cost of the current pointofsale system as part of the cost of the new pointofsale system.
He should ignore the cost of the current pointofsale system when evaluating the cost of the new pointofsale system.
A paper manufacturer has built a plant that meets all governmentmandated 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.
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