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Basic Question 11 of 16
Which of the following statements is false?
B. Opportunity costs are incremental cash flows and should be included in the capital allocation decision.
C. Opportunity costs are not incremental cash flows.
D. Opportunity costs are different from sunk costs.
A. Opportunity costs are cash flows that could be generated from assets that the firm owns if they are not used for the project in question.
B. Opportunity costs are incremental cash flows and should be included in the capital allocation decision.
C. Opportunity costs are not incremental cash flows.
D. Opportunity costs are different from sunk costs.
User Contributed Comments 6
| User | Comment |
|---|---|
| kutta2102 | why not A? |
| magicchip | because A is true. Thy are asking for FALSE. |
| aravinda | Am I missing something here.... Incremental cash flow is determined by subtracting the Opportunity costs (OC), does it not mean that the OC component is not part of the incremental cash flow? and if so, should 't C be true? -OR- May be since it is used to determine the Incremental cash flow, 'B' is correct and 'C' is false... :=( |
| divyas | @ Aravinda : Opportunity costs are considered while making a capital budgeting decision. (the word 'Incremental' here does not mean addition literally..It means any variation in cash flow & hence C is false.) I hope that solves your query! |
| mattg | caught me sleeping! I guessed B! Anything relevant to the capital budgeting process is an incremental CF |
| johntan1979 | Yup, caught me too. Anything that affects cash flow is incremental. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe principles of capital allocation and common capital allocation pitfalls
CFA® 2024 Level I Curriculum, Volume 2, Module 5.