1. Concepts used in cash flow estimation and risk analysis You can come across d

Question

1. 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 dedisions. Consider the following situation: The following table contains ive definitions or concepts. Identify the term that best corresponds to the concept or Aa Aa definition given. Concept or Definition Term An example of extemality that can have a negative effect on a firm A risk analysis technique that measures changes in the internal rate of retum (IRR) and net present value (NPV) as individual variables are changed The cash low 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 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? O No, because the company will still be able to sell the warehouse once the project is complete. O Yes, because the firm could sell the warehouse if it didn't use it for the new project. O No, because the cost of the warehouse is a sunk cost. A paper manufacturer has built a plant that meets all govemment-mandated environmental regulations, but the plant still produces an unpleasant ador when it is being operated. Many residents in the area dislike the paper mill because of these unpleasant adors. This is an example of extemality

Explanation / Answer

Since the options are not visible in the image, I am providing an example of each:

1. Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party. Hence example would be POLLUTION or CANNIBALIZATION

2. Sensitivity Analysis

3. Terminal value or Salvage value

4. Real option

5. Stand-alone risk

6. Yes, because the firm could get money by selling the warehouse. This is the opportunity cost of the business.

7. Negative externality

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