Which Statement is Correct for CFA® Level 1?

Explanation

Sunk costs should not be taken into consideration. Opportunity costs should be taken into consideration.

The correct answer is D. Relevant externalities should be incorporated into capital budgeting decisions.

Capital budgeting involves evaluating and selecting investment projects that will yield long-term benefits for a company. It is a crucial decision-making process as it determines the allocation of a company's financial resources to different investment opportunities.

Option A states that none of the answers are correct, which is incorrect. Option B states that all of the answers are correct, which is also incorrect.

Option C states that opportunity costs should not be incorporated into capital budgeting decisions. However, this statement is incorrect. Opportunity costs represent the potential benefits that are foregone when choosing one investment opportunity over another. These costs should be considered in capital budgeting decisions to ensure that the chosen investment provides the best return relative to other available options.

Option E states that sunk costs should be incorporated into capital budgeting decisions. This statement is incorrect. Sunk costs are costs that have already been incurred and cannot be recovered. In capital budgeting decisions, sunk costs should not be considered because they are irrelevant to the future cash flows associated with the investment. Only future costs and benefits should be taken into account.

Option D states that relevant externalities should be incorporated into capital budgeting decisions, which is the correct answer. Externalities refer to the impact of a project on stakeholders or the environment that is not reflected in the project's cash flows. Relevant externalities should be considered in capital budgeting decisions to account for any additional costs or benefits associated with the project that are not captured by the traditional cash flow analysis. By incorporating relevant externalities, companies can make more comprehensive and informed investment decisions.

In summary, the most correct statement is that relevant externalities should be incorporated into capital budgeting decisions (Option D).