Replacement Analysis

In the previous chapter we have compared various investment alternatives. Two scenarios were considered: single alternative and a set of mutually exclusive alternatives. Now we will evaluate the replacement of an asset, which is known as replacement analysis.

In performing replacement analysis two approaches are used. The first is called cash flow approach or insider viewpoint approach, where actual cash flows associated with keeping, purchasing, or leasing an asset are used directly. The second approach is called the opportunity cost approach or outsider viewpoint approach, which takes the view of an objective person outside the organization.