Specific Investment Decisions Flashcards
How can DCF techniques be useful in asset replacement decisions?
To assess how frequently a non-current asset that is in continual use in a business should be replaced
If asset is replaced less frequently?
It has a longer replacement cycle
Shorter replacement cycle characteristics?
Lower operating costs
Higher residual when asset disposed
Increased capex as asset brought more frequently
Longer replacement cycle characteristics?
Reduced capital expenditure
When asset gets older, it may cost more to operate
What is the equivalent annual cost
Minimises the costs per year over the replacement cycle
What is the ideal replacement cycle?
It minimises the costs per year over the replacement cycle
When an asset gets older?
There can be problems with reliability or quality as the asset ages
The equivalent annual benefit?
Expresses NPV from a project as an annuity (e.g. constant cash flow per year)
What is a lessor?
A lessor receives lease payments
What is a lessee/
A lessee makes lease payments
What are leases that minimise risk to lessee? (lessor perspective)
The lessor is responsible for servicing and maintaining the leased equipment. Usually short-term leases.
Leases that are purely a source of finance?
Long-term arrangements that transfer risks and rewardship of ownership of an asset to lessee
Lessee responsible for ina finance lease?
For upkeep, servicing and maintenance of the asset
Benefits of leasing to lessee
Availability
Avoiding loan convenants
Issue with loan covenants?
Act as a restriction on the abiltiy of a company to borrow in the future
