Final answer:
The salvage value of old equipment is relevant in incremental analysis for equipment replacement, as it represents a potential cash inflow. Unlike sunk costs, which are irrelevant, the salvage value can impact the cost-benefit analysis and the decision-making process.
Step-by-step explanation:
In an equipment replacement decision, the salvage value of the old equipment is indeed relevant in incremental analysis. Incremental analysis is a decision-making process used to assess the financial impacts of alternative choices. It involves comparing the relevant costs and benefits of different decisions, focusing on the changes or increments that each alternative will bring. In this context, the salvage value represents a potential incremental cash inflow from disposing of the old equipment. It is an opportunity that could be lost if not considered, and it contrasts with sunk costs, which have already been incurred and are irrelevant to future decisions. Understanding this distinction is crucial to making economically sound choices that maximize value.
Sunk costs, such as the original purchase price of the equipment, should be disregarded because they do not affect the future cash flows. Instead, decision-makers should focus on the marginal costs and benefits, incorporating elements like the salvage value that can influence the overall profitability of the new investment. Consequently, the salvage value has a direct impact on the cost-benefit analysis, affecting the conclusion on whether to proceed with the replacement.