Financial Management: Principles and Applications, 13/e

12.4 Replacement Project Cash Flows

To this point, we have been evaluating project cash flows for an expansion project that increases the scope of the firm’s operations but does not replace any existing assets or operations. In this section, we consider a replacement investment, an acquisition of a new productive asset that replaces an older, less productive asset. A distinctive feature of many replacement investments is that the principal source of investment cash flows is cost savings, not new revenues, because the firm already operates an existing asset to generate revenues.

The objective of our analysis of investment cash flows is the same for a replacement project as it was for the expansion projects considered earlier. Specifically, project ...