How are incremental cash flows found in a replacement analysis?
The choice to substitute an existing asset with another is defined as the net current and internal rates of cash returns, i.e. the variation between normal net cash flows where the current asset persists and net cash flows when the asset is substituted and the current asset is retained.
The current asset is named a defender in the field of capital budgeting and engineering economics, and the asset suggested to replace the defender is called a defender. The assessment of the defender's net cash flows, the challenger's net cash flows, and then the discrepancy in cash flows for the two acquisitions are used to measure the cumulative cash flow of such substitution study.
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