You can come across different situations in your life where the concepts from ca

Question

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 The risk that is measured by the project's beta coefficient A method to determine market risk by using the betas of single-product[ companies in a given industry 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

Explanation / Answer

1)

a) Risk that is measured by Beta coefficient - Systematic risk

b) Pure play method is used to measure market risk of single product companies

c) A computer generated simulation of most likely outcome given a set of future outcomes is called Monte carlo simulation.

d) What if Analysis provides the most likely scenario , it is called Base case scenario in capital budgeting

e) A measure of projects effect on firms earnings variablity is called - Firm Risk or Stand alone risk or Corporate risk. This is also known as Non systematic risk

2)

The owner of Cafe Bakka should ignore the cost of old machine while assessing the capital budgeting decision.

3)

It is an example of Positive externality as the budling enabled increased mobile phone sales.

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