Hi all,
On Schweser p. 222, under the “Replacement project analysis” explanation, why is it that we consider the sale of the old asset twice? Both in the initial outlay and in the terminal year non-operating cash flow?
Can anyone clarify that?
Many thanks!!
Andre
We’re not considering it twice.
If we replace the asset, then we sell it today, and include the cash flow (net of taxes) today.
If we don’t replace the asset, then we sell it in the future, and include the cash flow (net of taxes) in the future.
Hm. That makes sense, but according to Schweser (on p. 222) the sale of the old asset appears both in the initial outlay and the last year cash flow.
On the first, the initial cash outlay is the purchase of the new equipment minus the cash inflow from the sale of the old equipment.
Then, on the last year’s cash flow, the cash inflow is the sale of the new asset minus the sale of the old asset + the NWC amount.
Of course, all of that net of taxes as you mentioned.
So the net is zero times, not two times.
You sell it today (reducing you cash outflow), and you don’t sell it in the last year (reducing your cash inflow); the net is zero, as it should be.