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Understanding the cash flows that will result from a capital budgeting project as well as the risk involved is a very important responsibility of the financial manager. We often use historical data, when available, to conduct the necessary analysis but when a project is under consideration and represents a new idea, historical data will not exist. In approximately 100 words, provide a brief explanation of each of the following terms which relate to cash flow estimation. Give one example for each term.

Sunk cost (2 points for explanation; 1 point for example; 3 points total)

Opportunity cost (2 points for explanation; 1 point for example; 3 points total)

Strategic value (2 points for explanation; 1 point for example; 3 points total)

In approximately 150 words, respond to the following questions by explaining the concepts as well as citing one strength and one weakness of each:

Explain the concept of sensitivity analysis and indicate one strength and one weakness of this type of analysis. (6 points for explanation; 1 point for strength; 1 point for weakness; 8 points total)

Explain the concept of scenario analysis and indicate one strength and one weakness of this type of analysis. (6 points for explanation; 1 point for strength; 1 point for weakness; 8 points total)

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