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CAPITAL INVESTMENT APPRAISAL
Replacement of existing capital equipment
This calculation can be done in one of two ways:
Total basis:
1. Calculate the NPV if you continue manufacturing with the old asset.
2. Calculate the NPV if the new asset is purchased.
3. If the NPV of the new asset is greater then the NPV of the old asset then the asset
should be replaced.
However, if the new asset results in a negative net present value (even if it is better
than the old asset) it must be rejected and the company should rather sell the old
asset/discontinue production altogether.
Incremental/Marginal Basis:
Instead of two separate calculations as above the calculation is done on a marginal basis.
Your answer under this approach is the difference between number 1 and 2 above.
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