A capital budgeting project that calls for a replacement decision:
A)normally does not increase the volume of a firm's operations.
B)results in total cash flows that are equal to incremental cash flows.
C)has no initial period cash flows.
D)None of the above

Question

Quizplus · Accepted Answer

A replacement decision usually involves replacing an existing asset with a new one, which does not increase the volume of operations. Therefore, option A is the correct choice. Option B is incorrect because the total cash flows in a replacement decision include incremental cash flows and the salvage value of the old asset. Option C is also incorrect because a replacement decision involves initial cash flows such as the cost of the new asset and the proceeds from the sale of the old asset.

A Capital Budgeting Project That Calls for a Replacement Decision