All 34 Capital Budgeting questions
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How is risk incorporated into capital budgeting decisions? How do taxes and depreciation (capital allowances) affect project cash flows? How do you appraise projects with unequal lives? What is a perpetuity and how is it valued? What is the modified internal rate of return (MIRR) and why use it? How do real options add value in capital budgeting? How does post-audit (post-completion review) improve capital budgeting? How do you appraise a project under capital rationing with divisible projects?
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Budgeting & Forecasting › Capital Budgeting

How do you estimate the incremental cash flows for a replacement decision?

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Answer

For replacing an asset, use the difference between keeping the old and buying the new: incremental outlay (new cost less old's disposal proceeds and any tax effects), incremental operating savings/revenues, changes in working capital, and differences in terminal values. Only differential cash flows are relevant; shared or unchanged flows are ignored.
Real-world example Replacing a machine is appraised on the extra savings and net cost versus keeping the old one.

Common follow-ups: Why use differential cash flows? | What is included in the incremental outlay?

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All 34 Capital Budgeting questions