- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 3. Capital Allocation Principles and Pitfalls
CFA Practice Question
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.
Correct Answer: C
Opportunity costs are cash flows that could be generated from assets a firm owns if a project is not accepted. Since the acceptance of the project modifies the firm's cash flows, opportunity costs are incremental cash flows.
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. |