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 Marston Manufacturing 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 Marston Manufacturing Co. include the value of the warehouse as part of the initial investment in the new project? 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. No, because the cost of the warehouse is a sunk cost. 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.

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 2MCQ: To make a capital investment decision, a manager must a. estimate the quantity and timing of cash...

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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

Marston Manufacturing 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 Marston Manufacturing Co. include the value of the warehouse as part of the initial investment in the new project?

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.

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

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.

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