Asked by: Sulamita Zaigow
personal finance financial planning

What is the difference between expansion project and replacement project?

Last Updated: 4th April, 2021

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A key difference between a replacement project analysis and an expansion project analysis is that the net present value (NPV) technique that is used to evaluate capital budgeting projects should only be used to evaluate expansion projects, whereas either the NPV technique or the internal rate of return (IRR) technique

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In this regard, what are some differences in the analysis for a replacement project versus that for a new expansion project?

An expansion project is one in which new sales are generated. A replacement project is one in which an existing machine is replaced with a more efficient one—new sales might not be created, but cash flows improve because of the more efficient machine.

Subsequently, question is, what is an expansion project? Expansion projects are a type of capital investment project, designed to help a company expand and grow. New research and developing means new knowledge that can benefit all markets, companies, and investors. When a company invests in an expansion project, they are typically moving into a new target market.

Furthermore, what is a replacement project?

A replacement project is an undertaking in which the company eliminates a project at the end of its life and substitutes another investment.

What are the types of capital projects?

The most common examples of capital projects are infrastructure projects such as railways, roads, and dams. In addition, these projects include assets such as subways, pipelines, refineries, power plants, land, and buildings. Capital projects are also common in corporations.

Related Question Answers

Krzystof Folk

Professional

Why are interest charges not deducted when a project's cash flows for use?

The interest charges are not deducted when a project's cash flows are calculated for use in a capital budgeting analysis because the cost associated with financing are reflected in the. To include interest expense in the capital budgeting cash flow analysis it would double the cost of debt financing.

Adrianus Voolstra

Professional

Which is not included in a capital budget?

Conversely, non-cash expenses like depreciation are not included in capital budgeting (except to the extent they impact tax calculations for “after tax” cash ?ows) because they are not cash transactions.

Marni Arce

Professional

What is measured by the project's impact on uncertainty regarding the firm's future returns?

Company risk is measured by the project's effect on uncertainty about the firm's future cash flows. Analysts often use the standard deviation of the expected returns from a firm's existing portfolio of investments. The market risk of a project is typically the most difficult of the three types of risk to estimate.

Jose Siegsmund

Explainer

Can simulation analysis be used on capital budgeting problems?

A simulation model is a computer model that imitates a real-life situation. When applicable in capital budgeting, the simulation approach generally is more feasible for analyzing large projects because the technique requires estimates to be made of the probability distribution of each cash flow element.

Sumera Garthoff

Explainer

What are mutually exclusive projects?

In capital budgeting, mutually-exclusive projects refer to a set of projects out of which only one project can be selected for investment. A decision to undertake one project from mutually exclusive projects excludes all other projects from consideration.

Hamama Buffet

Explainer

What is NPV formula?

The NPV formula is a way of calculating the Net Present Value (NPV) of a series of cash flows based on a specified discount rate. The NPV formula can be very useful for financial analysis and financial modeling when determining the value of an investment (a company, a project, a cost-saving initiative, etc.).

Sorin Machlett

Pundit

What is replacement chain?

The replacement chain method is a capital budgeting decision model that compares two or more mutually exclusive capital proposals with unequal lives. The replacement chain method takes into consideration the different life spans of alternative plans, as well as their expected cash flows.

Wanderson Margenat

Pundit

What influences cash flow?

Analyzing the Factors that Affect Your Cash Flow. Accounts receivable, average collection period, accounts receivable to sales ratio--while you might roll your eyes at all these terms, they're vital to your business. Narrowing, or even closing, cash flow gaps is the key to cash flow management.

Fadil Orlacchio

Pundit

What is asset replacement?

A replacement cost is an expense a business must undertake to replace an essential asset of the company at the same or equal value. The asset to be replaced could be a building, investment securities, accounts receivable or liens. Accountants use depreciation to expense the cost of the asset over its useful life.

June Yanguela

Pundit

Is opportunity cost a cash flow?

In the context of cash flow analysis, opportunity cost can be thought of as a cash flow that could be generated from assets the organization already owns, if they are not used for the project in question. There is always a trade-off between making decisions on the allocation of assets.

Apsara Navacerrada

Teacher

Do you include opportunity cost in NPV?

In financial analysis, the opportunity cost is factored into the present when calculating the Net Present Value formula. NPV = F / [ (1 + r)^n ] where, PV = Present Value, F = Future payment (cash flow), r = Discount rate, n = the number of periods in the future.

Taoufiq Buchau

Teacher

Is opportunity cost and incremental cash flow?

The opportunity cost is the value of the next best alternative foregone. refer to a business' missed chances for revenues from its assets. They are often forgotten by accountants, as they do not include opportunity costs in the computation of incremental cash flow. This illustrates the opportunity cost of $5,000.

Dulcina Melle

Supporter

How do you manage capital projects?

12 strategies for managing capital projects
  1. Begin the project with a clear objective and a concise master facilities plan.
  2. Select qualified team members who share the vision of the owner.
  3. Base the size of the project on a conservative business plan.
  4. Minimize incremental program requirements.
  5. Evaluate the cost impact of the building footprint.

Abdelbasset Wubben

Supporter

What is an example of capital budgeting?

Capital budgeting makes decisions about the long-term investment of a company's capital into operations. Planning the eventual returns on investments in machinery, real estate and new technology are all examples of capital budgeting.

Ethan [email protected]

Beginner

How are infrastructure projects funded?

The most common ways of funding infrastructure are either via taxes or charges. Taxes: funding for infrastructure - from A-roads to HS2 - comes out of government revenue. Around 60% of government revenue comes from income tax, National Insurance contributions and VAT.