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Chapter 5

2.1 Assumptions and limitations

 Trading cash flows from the use of the asset are ignored as they are assumed
to be similar whichever asset / replacement cycle is chosen (in reality using an
older asset may lead to lower operating cash flows from reduced productivity or
quality)

 Operating efficiencies of machines will be similar with differing machines and
with differing ages (in reality efficiency is likely to reduce over time and some
suppliers may produce more reliable equipment than others)

 The assets will be replaced into perpetuity or at least into the foreseeable future

 In most questions tax and inflation are ignored (e.g. therefore assumes that the
purchase price won’t rise each time the asset is replaced!)

 Non-financial aspects are ignored (e.g. older machines may come with higher
pollution levels)

In reality changing technology, inflation and changes to production plans are all likely
to limit the effective use of replacement analysis using equivalent annual costs.

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