Question

A capital budgeting project that calls for a replacement decision: a. normally does not increase the volume of a firm's operations. b. results in total cash flows that are equal to incremental cash flows. c. has no initial period cash flows. d. None of the above

Answer 1

In capital budgeting, a replacement decision usually does not aim to increase the firm's operations volume but to maintain efficiency by updating assets, and it does involve initial cash flows related to the asset replacement.

Step-by-step explanation:

In the context of capital budgeting, a capital budgeting project that calls for a replacement decision:

1. Normally does not increase the volume of a firm's operations. Replacement decisions are typically made to substitute old assets with new ones to maintain efficiency, not necessarily to expand operations.
2. Results in total cash flows that are considered to be equal to incremental cash flows. When calculating the profitability of a replacement, we need to look at the additional cash flows generated by the replacement, not just the total cash flows of the new asset.
3. Does have initial period cash flows, which include the cost of the new asset and any proceeds from the disposal of the old asset.

Therefore, the correct answer is that a capital budgeting project for a replacement decision normally does not increase the volume of a firm's operations (a).