ACCA Financial Management (F9) Certification Practice Exam

Relevant cash flows in capital budgeting are characterized by which of the following?

1. Include costs incurred in the past

2. Include future committed costs

3. Specific cash flows to be considered for decisions

4. All projected revenues

The correct answer is: Specific cash flows to be considered for decisions

In capital budgeting, relevant cash flows refer specifically to those cash flows that will directly change as a result of a particular investment decision. This means that when evaluating a potential project, only the cash flows that will occur in the future if the project is accepted are considered relevant. The correct answer focuses on the necessity of evaluating cash flows that are incremental to the project. This includes additional revenues and costs that will be realized from the project, but it excludes costs that have already been incurred (sunk costs) or committed costs that would occur regardless of the project decision. For instance, if a company is considering launching a new product, it will only look at the revenues generated from the product and the additional costs that would arise solely due to this new venture. Past expenses or profits from other operations do not impact this assessment, as they have already been incurred and cannot be changed. By concentrating on these specific future cash flows, decision-makers can better assess whether the investment will generate a satisfactory return and is therefore worthwhile. This approach helps eliminate irrelevant factors and focuses only on those elements that will affect the financial outcome of the project.