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CMA USA PART 2 SUMMARY SECTION E INVESTMENT DECISION
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Summary - CMA USA PART 2 SECTION E INVESTMENT DECISION .CONTENT WISE TABLE MANNER FLASHCARD STYLE.EASY TO GRASP IDEAS WITH SIGNIFICANT IDEAL EXAMPLE
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SECTION E – Investment Decisions (Weightage 15%)S.No Questions Answers
1. What are relevant revenues, Relevant revenues, costs, or cash flows vary with one course of action
costs, or cash flows? over another, and they are the important factors in a decision,
because all other revenues, costs and cash flows are the same for all
options. Relevant revenues, costs, or cash flows may be
either incremental or differential.
2. What are Sunk Cost? A sunk cost is one that has already been incurred and therefore is not
a relevant cost.
3. What is a Committed Cost? The company has already agreed to and committed itself to a
committed cost, even if the invoicing or delivery of the product or
service has not taken place.
4. What is a Common Cost? A common cost is shared by all of the available options or all divisions.
Because it is the same for all options, it is not relevant and should not
be taken into account in making a decision between any two different
options.
5. What is a deferrable A deferrable cost is one that can be deferred to future periods without
(discretionary) cost? creating a significant impact in the current period. Marketing and
training are often considered deferrable costs.
6. What is a differential A differential revenue or differential cost or differential cash flow is
revenue, cost, or cash flow? the difference in revenue, cost, or cash flow between two
alternatives.
7. What is a fixed cost? A fixed cost remains constant over the specified level of activity
(the relevant range).
8. What is a tax A tax concession or relief is a reduction in the tax rate that the
concession or relief? company needs to pay (concession) or perhaps a period of time during
which taxes do not need to be paid at all (relief). Tax concessions and
relief can become very complicated issues when a company has
investments in different countries or tax jurisdictions in the U.S.
9. What is an avoidable cost? An avoidable cost is one that can be avoided or eliminated by making
a decision not to invest, or to cease investing.
10. What is an imputed cost? An imputed cost is an opportunity cost. An imputed, or opportunity,
cost is the benefit that is given up as a result of using the company’s
resources elsewhere. It is the benefit of the next best option.
11. What is an incremental An incremental revenue or incremental cost or incremental cash flow
revenue, cost or cash flow? is the additional revenue, cost, or cash flow from choosing an activity
over not choosing any activity.
12. What is an opportunity cost? An opportunity cost is a forgone alternative that had to be dismissed
in order to achieve a goal. Opportunity cost is the cost of the “next
best alternative” or the “next highest valued alternative.”
13. What is the objective of The objective of using capital budgeting to select projects is to
using capital budgeting maximize the value of its equity and thus maximize shareholder
to select projects? wealth.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 51 of 66
, 14. What are some of the a that The investment might improve the quality of products and
can affect capital budgeting services offered.
decisions? The investment might shorten the time in which products and
services can be produced and/or delivered to customers.
The investment might address consumer safety concerns.
The investment might be required because of government
regulations or environmental protection concerns.
Worker safety might be improved by the investment.
The company’s public relations—its image and prestige—
might be impacted positively by the project.
The community where the firm operates could be served by
the investment.
The owners and/or the management might simply want to
make the investment.
15. What are the annual cash 1. Another cash investment. It is possible that a follow-up
outflows that may result investment must be made after some period of time, or that
from a new project? there will be a capital investment that needs to be made with
the equipment to maintain it after a certain number of years.
These would both be treated as cash outflows for the amount
that is paid in the year it is to be paid.
2. Further working capital investment. The company may need
another increase in its working capital later in the project’s
life. This additional increase is treated in the same manner is
the increase in working capital at the start of the project,
except it occurs in a later year.
16. What are the expected cash 1. The initial investment is the cash outflow that is used to
flows at the beginning of a purchase the new machinery or make the initial investment
project? into the project. The initial investment includes any setup,
testing or other related costs.
2. Initial working capital investment - working capital will
increase incrementally by the amount of the increase in
current assets (accounts receivable and inventory) minus the
amount of increase in current liabilities (accounts payable) as
a result of the new project.
3. Cash received from the disposal of the old machine if there
is an old machine to be disposed of. Cash received from the
disposal of the old machine is a cash inflow and
therefore reduces the initial investment for the new
machine.
17. What are the cash flows that 1. Cash received from the disposal of equipment. The cash
result from the end of the received from the sale of any assets (equipment, machines or
project? the investment project itself) is a cash inflow in the final year
of the project.
2. Recovery of working capital. The initial incremental
investment in working capital and any subsequent
From the Desk of Muhammad Zain – Founder of Zain Academy Page 52 of 66
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