CFA Level 1: Most Correct Statements

Which Statements Are Most Correct?

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Question

Which of the following statements is most correct?

Answers

A. Corporations should fully account for sunk costs when making investment decisions.

B. All of the answers are correct.

C. The rate of depreciation will not affect operating cash flows, because depreciation is not a cash expense.

D. Corporations should fully account for opportunity costs when making investment decisions.

E. None of the answers are correct. D

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Explanations

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A. B. C. D. E.

Explanation

Cash flow = Net income + depreciation; therefore, depreciation affects operating cash flows. Sunk costs should be disregarded when making investment decisions, while opportunity costs should be considered when making investment decisions, as they represent the best alternative use of an asset.

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