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Question 17 5 pts What is the difference between the cash flow approach and the opportunity cost approach for replacement decisions? These are actually two
Question 17 5 pts What is the difference between the cash flow approach and the opportunity cost approach for replacement decisions? These are actually two names for the exact same approach. Thus, there is absolutely no difference between them. The opportunity cost approach treats the sale proceeds from selling the defender as a "cost" of keeping the defender, whereas the cash flow approach treats those proceeds as revenue when acquiring the challenger. Only the cash flow approach factors in taxes, so it is the only one we should ever use. The opportunity cost approach factors in the trade-in allowance, whereas the cash flow approach does not. Question 16 5 pts The city of Johnsonville has a number of older construction vehicles with a current market value of $1 Million. The vehicles could be used for another four years, with their market value decreasing by 15% each year. The costs to operate and maintain/repair the vehicles is expected to be $400,000 next year and to increase by $30,000 each year after. However, the vehicles could all be replaced with new machines costing $2.5 Million. The new vehicles would have operating and maintenance costs of only $150,000 in their first year, which will increase by 10% year over year after. The market value of the new vehicles will be $2 Million after 1 year, decreasing by 12.5% year over year after. The new machines could function up to 4 years after acquisition. The city uses an interest rate of 8%. Perform a replacement analysis using the opportunity cost approach, including marginal analysis, to determine in which year the defender should be replaced. Year 5 Year 4 Year 3 Year 0
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