Stonewood Manufacturing is evaluating whether to replace one of its existing machines with a new, more technologically advanced one. Which of the following statements concerning a replacement decision analysis is correct?
a. When computing the supplemental operating cash flows associated with the purchase of the new machine, only the after-tax cash flows that the new machine is expected to generate each year should be included in the computation.
b. The net cash flow from the sale of old machine should be included as part of the new machine's initial investment outlay.
c. The annual depreciation expense associated with the new machine should be included in the computation of the new machine's terminal cash flow.
d. If the old machine is sold for a loss when it is replaced, the loss is treated as a cash outflow in the computation of the new machine's initial investment outlay.
e. An increase in the net working capital that occurs when the new machine is purchased is treated as a cash inflow when its initial investment outlay is computed.

d. If the old machine is sold for a loss when it is replaced, the loss is treated as a cash outflow in the computation of the new machine's initial investment outlay.

Explanation:

The correct statement here makes the right assumptions about the initial investment outlay of the machine.

These assumptions are made because of the fact that the price of the old machine would probably be less than the new one so it will be sold at a loss.

Now when the total investments that are to be made are calculated it is essential for the service to include this net difference which would then be covered.

If there is little hope for recovery then this should not be done and the replacement must be cancelled.