Regarding the Net Present Value of a Replacement Decision, Which

question 29

Multiple Choice

Regarding the net present value of a replacement decision, which of the following statements is false?

• A) The present value of the after tax cost reduction benefits resulting from the new investment is treated as an inflow.
• B) The after-tax market value of the old equipment is treated as an inflow at t = 0.
• C) The present value of depreciation expenses on the new equipment, multiplied by the tax rate, is treated as an inflow.
• D) Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0.
• E) An increase in net operating working capital is treated as an outflow when the project begins and as an inflow when the project ends.

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Definitions:

Profit Requirement

The minimum level of earnings necessary for a business to sustain its operations or fulfill its financial goals.

Profit Mark-Up

The percentage added to the cost of goods to arrive at the selling price.

Target Selling Prices

The intended price at which a company aims to sell its products, often determined by market conditions and cost considerations.

Target Cost

The desired cost of a product derived from its expected selling price and desired profit.