Schweser Practice Exams Vol 2 Exam 2, Question no. 85 -->Refers to a ‘Replacement Project’. The solution to this question adjusts the ‘old’ machine’s salvage-book value (90,000) at the END OF THE FINAL PERIOD. -->However, Study Session 8, SchweserNotes, LOS 29a, Replacement Project Analysis states “Reflect the sale of the old asset in the calculation of the INITIAL OUTLAY” And this outlay = FCInv + NWCInv - Sal0 + T(Sal0 - B0) And the same has been utilized in the example on the next page. Why this apparent double standard? What am I missing? Really appreciate any help, Thanks! -M
No takers? 
one last try…pls help
You adjust when the asset is sold or replaced, and you’ll need to read that in the problem to figure it out. Most assets are sold at the end of the final period, and that’s where you’ll determine the remaining value–in the terminal value. If it states, “you buy a replacement asset, and the old asset is sold at the beginning of the period”, you will put that in the initial outlay. Just don’t mix asset sales with operating cash flows, they go in initial outlay or terminal value; the questions will be clear.
Thanks @SeesFA! However I’m still not quite clear with what’s happening in the question. -->It seems that Tera Project (the new asset) would replace GigaTech (the old one). -->Tera Project will last 3 years. From this I glean that GigaTech (old asset) will be useless as soon as Tera Project (new asset) is bought, i.e. “the old asset is sold at the beginning of the period”, so this needs to be put in the initial outlay. But the solution puts it in the terminal value. What am I missing?
Hey - I got this wrong as well. What happened was the replacement project was for three years. The original project also had a remaining life of three years. When you work this one out you have to think about all the usual things you consider when dealing with replacement projects - THE DIFFERENCE in the cash flows from one project to the other. Sales new - sales old = sales replacement Costs etc Depreciation Also, and this is not something we normally see but is completely possible, is the difference in salvage - book value for both sales. Normally, a replacement will have a salvage value where as the orignal will normally not be sold if you continue to run it out hte life of the project (piece of shit old machine won’t sell but new one might still sell in a few years). In this case both are salvaged at year three Terminal Cash flow Salvage new - Salvage old - Tax [(salvage new - bv new) - (salvage old - bv old)] (something like that - i’m at work and don’t have the question in front of me). You also need to remember to include the reversion of the NWC cash flows (*110 if I remember correctly). The key takeaway in this is to remember to always look at the DIFFERENCE IN CASH FLOWS and these can and will include sales, costs, depreciation and salvage/profit on sale.
Thanks CFA_Chap, So you’re saying that in this case, even though this is a “Replacement” project, the new equipment is going to run alongside the old one for 3 years? Kind of beats the point of having new stuff ‘replace’ old stuff. So this is like a phased out replacement or something…weird.