When making replacement decisions, the development of relevant cash flows is complicated when compared to expansion decisions, due to the need to calculate ________ cash inflows.
A) conventional
B) non-conventional
C) incremental
D) initial

Question

Quizplus · Accepted Answer

When making replacement decisions, it is necessary to calculate incremental cash flows, meaning the difference between the cash flows generated by the old asset and the cash flows generated by the new asset. This is necessary to determine if the replacement decision will be profitable. Conventional cash flows refer to cash flows that follow the pattern of initial investment followed by a series of positive cash flows, while non-conventional cash flows do not follow this pattern. Initial cash flows refer to the cash flows that occur at the beginning of a project or investment. Therefore, the best choice for this question is C - incremental cash flows.

When Making Replacement Decisions, the Development of Relevant Cash Flows