- 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
The following cash flows should be treated as incremental flows when deciding whether to go ahead with an electric car except ______.
A. the consequent deduction in sales of the company's existing gasoline models
B. the value of tools that can be transferred from the company's existing plants
C. interest payment on debt
User Contributed Comments 11
| User | Comment |
|---|---|
| kalps | Debt finance is not treated as an incremental flow as it is accounted for in the Cost of capital I think. |
| Angelique | The value of the tools from the other plants is a sunk cost. Why is that included in incremental cash flows? |
| muloma | The value of tools is an opportunity cost since they could have been used in existing operations to generate cash flow |
| SnowWhite | The value of the tools could have also been sold, that's why you include it. (Another opportunity cost) |
| americade | I believe the answer should be A, it is an incremental cost - cannibalization. Interest payments is aleady reflected in cost of capital. |
| danlan | Kalps is right |
| Shelton | interest payment on debt = debt financing ~ Cost of capital != incremental flows |
| steved333 | Yeah, interest is figured in the WACC |
| sheenalim | americade, your statement is correct, however the question says EXCEPT, so the only statement wrong here is interest payments. |
| StanleyMo | never include interest payment in the cash flow calculation! |
| serboc | interest is on corp debt is tax deductible (1-t) |