Stonewood Manufacturing is evaluating whether to replace one of its existing machines with a new, more technologically advanced one. Which of the following statements concerning a replacement decision analysis is correct?
A)When computing the supplemental operating cash flows associated with the purchase of the new machine, only the after-tax cash flows that the new machine is expected to generate each year should be included in the computation.
B)The net cash flow from the sale of old machine should be included as part of the new machine's initial investment outlay.
C)The annual depreciation expense associated with the new machine should be included in the computation of the new machine's terminal cash flow.
D)If the old machine is sold for a loss when it is replaced, the loss is treated as a cash outflow in the computation of the new machine's initial investment outlay.
E)An increase in the net working capital that occurs when the new machine is purchased is treated as a cash inflow when its initial investment outlay is computed.

Question

Quizplus · Accepted Answer

The net cash flow from the sale of the old machine should be included as part of the new machine's initial investment outlay. This is because the sale of the old machine will generate cash inflows that can offset the initial investment required for the new machine. The other statements are not correct. A) The before-tax cash flows should also be included in the computation of the supplemental operating cash flows. C) The annual depreciation expense would affect the operating cash flows, but not the terminal cash flow. D) The loss from the sale of the old machine would be a cash inflow, not a cash outflow. E) An increase in net working capital represents a cash outflow, not a cash inflow.

Stonewood Manufacturing Is Evaluating Whether to Replace One of Its