CFA Practice Question

CFA Practice Question

Which of the following constitutes an example of a cost which is not incremental, and therefore not relevant in an accept/reject decision?

I. A firm has a parcel of land that can be used for a new plant site or, alternatively, to grow watermelons.
II. A firm orders and receives a piece of new equipment, which is shipped across the country and requires $25,000 in installation and set-up costs.
III. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switch from another product the company currently produces.
A. I and II
B. II and III
C. None of these answers is correct.
Explanation: These are examples of opportunity costs, externalities, or installation costs; they are all incremental cash flows.

User Contributed Comments 2

User Comment
Mariana80 why is I incremental? The land is already owned by the company, wouldn't it be a sunk cost?
SKIA The land is incremental because it can be used for something other than just being land, i.e. new plant site or to grow watermelons.
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