Replacement Analysis - Factors to consider
8 important questions on Replacement Analysis - Factors to consider
What are [6] factors to be considered in replacement studies?
- Recognition and acceptance of past errors;
- Sunk costs;
- Existing asset value (outsider viewpoint);
- The economic life of the proposed; replacement asset (challenger);
- The remaining economic life of the old asset (defender);
- Income tax consideration;
Describe the factor past estimation errors
Often not the result of errors but the inability to look into the future.
MV | Market Value and BV | Book Value are not the same.
What is a sunk cost?
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What is the Sunk-Cost trap?
What is the idea of the outsider viewpoint?
Focus is on present and future cash flows in a replacement study, avoiding temptation to dwell on past (sunk) costs.
What is the outsider viewpoint also known by?
What is the total investment in the defender considering the outsider viewpoint?
What is important considering Income Tax Consequences doing a replacement study?
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