CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following statements is false?

A. Externalities refer to the effect of a project on other parts of the firm.
B. Cannibalization, when a new project takes sales from an existing product, is one type of externality that occurs.
C. The effect of externalities and cannibalization on cash flow is not incremental and should not be included in the capital budgeting decision.
Correct Answer: C

Externalities and cannibalization affect the cash flows of a firm and are a direct consequence of accepting a project. Therefore, they affect incremental cash flows and their effect on cash flows should be included in the capital budgeting decision.

User Contributed Comments 2

User Comment
americade Both types of externalities are incremental and should be used to adjust cash flows. That's the last one is FALSE.
ascruggs92 Negative externalities are non-incremental because they occur regardless of whether the project happens or not. However, they still need to be included in the capital budgeting decision, that's why it is false
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