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 (initial investment outlay).
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 (initial investment outlay).
E) An increase in net working capital is treated as an outflow when the project begins (initial investment outlay)and as an inflow when the project ends (terminal cash flow).

Question

Quizplus · Accepted Answer

The statement in D is false because a loss on the sale of old equipment would actually reduce taxable income, resulting in a tax shield. Therefore, the tax benefit from the loss (loss multiplied by the tax rate) is treated as an inflow, not an outflow.

Regarding the Net Present Value of a Replacement Decision,which of the Following