Question

TRUE or FALSE?

1. When evaluating mutually exclusive Annual Worth Alternatives choose the Shortest Life Cycle for the evaluation.

2. Depreciation is treated as an expense but is not a Cash Flow.

3. Straight Line depreciation is no longer used by U. S. corporations for IRS tax purposes.

4. Double declining balance is 2X the Straight Line portions of depreciation.

5. Replacement Analyses uses equivalent uniform annual costs to compare the defender versus the challenger(s).

6. The Cash Flow Approach of Replacement Analysis is also known as the Insider’s View.

7. The Optimum Replacement Interval Analysis always includes the equipment’s Salvage Value

Answer 1

1. FALSE

While evaluating mutually exclusive Annual Worth Alternatives, the alternative with the Lowest Life Cycle Cost (and not the time span) that meet's investor's objectives and constraints is preferred investment.

2. TRUE : Depreciation is treated as an expense but is not a Cash Flow.

Depreciation is a noncash accounting charge and does not have a direct impact on the amount of cash flow generated by a business or project. However, as long as there is sufficient taxable income to absorb it, depreciation is a tax-deductible expense and reduces tax cost, which has a positive impact on cash flow.

3. FALSE

Straight line is one of the methods allowed by the IRS to deduct assets over multiple years. The straight line method is typically only used for intangible assets like software and copyrights, as well as nonresidential real property.

4. FALSE

Depreciation for a period = 2 x straight-line depreciation percent x book value at beginning of period.

5. TRUE

As per Replacement Analysis, the useful life of the challenger (which is generally greater than remaining life of defender) is taken as the study period. During this analysis, it is assumed that the equivalent uniform annual cost of the defender (i.e. the shorter life span alternative) will be same after its remaining life and till the end of the study period. In other words the shorter life span alternative will function at the same equivalent annual cost throughout the study period.

6. TRUE

Two approaches are commonly used in replacement analyses: Cash Flow Approach(insider viewpoint) and Opportunity cost approach (outsider viewpoint)

7. FALSE

Optimum Replacement Interval Analysis doesnt always includes the equipment’s Salvage Value.