Skip to content

CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation

A utility must install new emissions-control equipment to meet a new environmental law, even though the equipment will generate no direct revenue. This project is most likely evaluated:

The project is most likely evaluated as a mandatory regulatory project, where the focus is on the least costly way to comply. Because it is legally required and generates no direct revenue, comparing its return with discretionary expansion projects is not the appropriate approach.

  1. Aby comparing its net present value with that of expansion projects
  2. Bas a mandatory project, where the decision focuses on the least costly way to complyCorrect
  3. Cby applying a higher hurdle rate than discretionary projects

Explanation

Regulatory or compliance projects are required, so the decision is usually how to comply at lowest cost, sometimes justified by avoided penalties or lost operations. Standard NPV comparison against revenue-generating expansions is inappropriate since the project has no direct revenue.

Did you get it right without looking?

One question tells you little. A timed set on Capital Investments and Capital Allocation shows your real accuracy, how long you take and where you lose marks.

Practise Capital Investments and Capital AllocationFree diagnostic mock

More Capital Investments and Capital Allocation questions