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) opportunity
C) incremental
D) sunk

Question

Quizplus · Accepted Answer

Replacement decisions require the calculation of incremental cash flows, which are the additional cash flows that result from a particular investment. This is because the decision involves replacing an existing asset that is generating cash flows, so the relevant cash flows are the incremental cash flows that will result from the replacement. Conventional cash flows are the expected cash flows of a project without consideration of its alternatives, whereas opportunity cash flows are the cash flows associated with an investment opportunity that is forgone when a particular investment is chosen. Finally, sunk costs are costs that have already been incurred and are irrecoverable, so they are not relevant to the decision-making process.

When Making Replacement Decisions, the Development of Relevant Cash Flows