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

The specific cash flows that should be considered in a capital budgeting decision

A cost that has been incurred and may be related to a project but should not be part of the decision to accept or reject a project

The cash flows that the asset or project is expected to generate over its life

The effects on other parts of the firm

The cost of not choosing another mutually exclusive project by accepting a particular project

Newcastle Coal Co$.$ 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 Newcastle Coal Co$.$ include the value of the warehouse as part of the initial investment in the new project?

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

Yes, because the firm could sell the warehouse if it didn't use it for the new project.

No$,$ because the company will still be able to sell the warehouse once the project is complete.

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.