Question 22 3. Which of the following statements is true regarding a replacement

Question

Question 22 3. Which of the following statements is true regarding a replacement decision? O An increase in the net working capital is treated as an inflow when the project begi ns (initial investment outlay) and as an outflow when the project ends (terminal cash flow). O The net cash flow from the sale of an old equipment is treated as an outflow at t- 0 (initial investment outlay). O Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t-0 (initial investmen outlay). O The benefits resulting from the new investment is treated as an inflow. O The depreciation expenses on the new equipment is treated as an outflow. Nex Previous 842/take/ ions/82296555

Explanation / Answer

Answer is The benefit resulting from new investment is treated as an inflow.

Explanation:

The Following shall be considered for taking replacement decisions:

1. Increase in working capital is cash outflow initially and will realised at end of period taken as cash inflow.

2.Salvage value of old equipment today shall be treated as cash inflow.

3. Tax benefit from loss on sale of old equipment shall be treated as cash inflow.

4. The benefits in the form of savings in cash expense or increase in revenue shall be treated as inflow.

5. Tax benefit on depreciation on new asset shall be treated as cash inflow.

Hence, from all the above, the point 4. The benefit shall be taken as inflow is correct.

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