BU393 Chapter Notes - Chapter 10.3: Net Present Value, Cash Flow
Document Summary
Replacement projects compare 2 decisions: keeping the old equipment, replacing it. Time 0 (date of replacement): incremental cash flows = salvage old asset cost of new asset. = cash flows associated with replacement cash flow associated with old asset. Terminal year: = salvage value of new asset salvage value of the old asset. Price of new asset is negative because you are purchasing it. Salvage value of old asset is positive because you"re getting money for selling an asset. Increase in net working capital is negative because you need to increase your inventory amount. Therefore, the initial cash flow will most likely be negative most of the time. Operating cash flows: new depreciation expense old depreciation expense = incremental depreciation. Incremental capital cost = cost of new machine salvage value of old machine. Increase in net working capital is return to investors at the end of the project.
