Which of the following statements is true regarding a replacement decision? The

Question

Which of the following statements is true regarding a replacement decision?

The depreciation expenses on the new equipment is treated as an outflow.

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 investment outlay).

An increase in the net working capital is treated as an inflow when the project begins (initial investment outlay) and as an outflow when the project ends (terminal cash flow).

The benefits resulting from the new investment is treated as an inflow.

The net cash flow from the sale of an old equipment is treated as an outflow at t = 0 (initial investment outlay).

Explanation / Answer

The benefits resulting from the new investments is treated as an inflow is correct. This is because the cash comes in due to the investment and this has to be +ve and all the cash that goes out of business is outflow. But in case of depreciation it is not outflow because in reality no such transaction has taken place it is just done for accounting purposes.

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