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Basic Question 5 of 16

Which of the following statements is (are) false?

I. The relevant cash flows are the specific cash flows that should be considered in the capital allocation decision.
II. Capital allocation decisions must be based on cash flows, not on accounting income.
III. Only incremental cash flows are relevant to the accept/reject investment decision.
IV. Cash flows are the accounting profits generated by a firm.
V. Accounting income includes some items that are not cash flows.
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User Contributed Comments 5

User Comment
spillo help please
CFA1Dec11 III. Only incremental cash flows are relevant to the accept/reject investment decision. ?

Why this is true ?
viruss I guess that it is because previous cash flows (+ and - >> sunk costs)shouldn't be consider. You take into account cash flows from 0 not from t = -4 e.g.
robbiecow Based on the CFAI book you must include opportunity cost in the project costs. Not sure if the assumption here is that opportunity cost is being included in incremental CFs as it is the additional CF realized as a result of a decision.

Anyone...
vadfir Incremental cash flow is additional cash flow a firm receives after taking on the project (forget sunk costs, subtract opportunity costs, consider side effects, recognize investment) . So incremental mentioned in III relates to net amount.
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Edward Liu

Edward Liu

Learning Outcome Statements

describe principles of capital allocation and common capital allocation pitfalls

CFA® 2024 Level I Curriculum, Volume 2, Module 5.