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 project$$s effect on the firm$$s earnings variability

The risk that is measured by the project$$s 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 $$25,000,$ but it will dramatically improve the speed at which his counter staff will be able to take orders; it will also reduce the owner$$s 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 ignore the cost of the current point$-$of$-$sale system when evaluating 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 include the cost of the current point$-$of$-$sale system as part of the cost of the new point$-$of$-$sale system.

A cell phone company recently gave customers the ability to buy applications that they can download to their cell phones. Allowing customers to use these applications increased cell phone sales. This is an example of externality.