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I am curious if the replacement npv, uses variables of working capital as well?
From the lectures you have shown in replacement investment appraisals; investment cost, scrap value, their operating cost ( like maintenance ). Is there any other variable that could be incorporated?
Many Thanks
Usually there are only the ones you mention (in the exam).
However there is no reason why there should not be others.
For example it could be that the sales revenue changes with the age of the machine.
Usually we completely ignore the sales revenue because we assume that it will be the same each year – so we just look at the costs and choose the cheapest option.Having sales revenue in the exam is unlikely, but whatever flows are given the approach remains exactly the same.
(I cannot think of any way that he could bring in working capital – since the machine is being replaced we are going to need any working capital all the time, however often we replace.)
hello, i am interested to know if with replacement invesment decisions, we are to include maintenance cost in the year of disposal, and also how to treat it if it has to do with a purchase or lease decision in which maintenance cost has been given, ie whether to include it in the year of disposal.
thanks.hello, please i am a little confused about the treatment of maintenance cost in Investment replacement decisions as well as in a lease or purchase decision, especially with regards to the year of repacement or disposal.
With replacement:
The need is to choose the best period which costs the company less. So here the costs are concerned ( like maintenance etc…).It is just simple. Take the initial cost ( investment cost ). After that take the maintenance cost for periods ( apply inflation if there is required ). Then take the NPV of required period like 2 and 3.
After that apply the Equivalent Annual Rate i.e, NPV/annuity of period
Make decision on lowest costs.
With Lease/buy:
Here we are after to optimal investment for the years that will exploit the investments opportunities.So its bit trick but straightforward.
At lease; dont take maintenance costs, but just rentals and take taxes on them.
At purchase: take maintenance costs like $1000. Take the corporate tax ( assume 30% ). It will give $300. Dont deduct it. Take Capital allowances as well.
As far as I went throughout all the past papers and kit questions. There is nothing beyond these tricks.
acca2050: Thank you for answering, but please don’t answer in this forum – it is Ask the Tutor and you are not the tutor 🙂 Restrict yourself to the general ACCA forum.
tommyblock: What acca2050 says is correct.
However, with specific regard to the maintenance costs – there is no rule, it depends on the question. Usually maintenance will be payable in the final year and you will bring it in. I think you might be referring to one particular question (I think it is in the Kaplan text) where it is not brought in. However this is not because it is a rule for replacement questions – it is because the question specifically says that there will be no maintenance in the final year.
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