FIN Ch. 10

The market value & book value of an asset is also what?

The selling price of the asset

2 approaches to NPV with unequal lives:

1. Replacement Chain 2. Equivalent Annual Annuity

Two ways to evaluate the alternative projects?

1.Calculate NPV of the cash flows derived from the project and then subtract the initial cash outlay. 2. If PV>Initial Cash outlay => NPV>0 => Value of firm increases, so accept the project when NPV>0.

What does the Replacement Chain approach assume?

Assume that at the end of the 5th year you buy another machine 1 that gives the same cash flows & costs the same

Why is total cost almost always negative?

It two componants are negative.

When do you pay taxes on the whole amount?

When you depreciate the asset to zero

What is a situation for the lowest equivalent annual cost?

You are considering the purchase of new equipment. Your analysis includes the evaluation of two machines which have differing initial on going cost and differing lives. You should select the machine that has the lowest annual cost.