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Asset Replacement Principles Essay

Asset Replacement Principles Essay Sample

In this written essay sample we shall focus and discuss the asset replacement principles and other aspects in relation to it by using a general model. The asset replacement principles are applied to both the appreciating and the depreciating assets.

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Resources are allocated to ensure asset management with the purpose of replacing the assets in the future and increasing the life of the present existing assets. The optimization of management of asset programs and technology is more likely to reduce the asset replacement task.

Asset Replacement Decisions 

The asset replacement decisions depend upon the net present value (NPV) and an internal rate of return of the incremental cash flows. The asset presented to be replaced is known as the defender while the asset that shall replace the defender is known as the challenger.

The calculation involves the net flows from the defender and the challenger and finding out the difference between the cash inflows of two assets. This calculation is used for making decisions on the application of asset replacement principles.

The formula which is used for the very calculation of the cash flows is.

  • Net cash flows = revenue –operating expenses-depreciation * (1-tax rate) + depreciation

When the existing asset is being replaced either through selling or disposal and an investment is made on the new asset it shows the income tax implications which are reflected during the calculation of the initial investment.

When the asset is being sold at a relatively higher amount than the actual valuation then the company has to bear a tax cost which is added to the initial investment. If the sale price is lower than the book value then the tax shield is to be deducted from the sum of the cost of the new asset and the sale proceeds of the older asset. Such asset replacement is done due to the sudden failure or gradual deterioration of the assets.

Important Elements Related to the Decisions of Asset Replacement Principles 

  • The initial, operating, running, and maintenance costs of the assets are considered to be deferred over the period of asset replacement so that the time period of the asset replacement could be decided.
  • As time approaches assets get older decreasing their value of realization while the operating costs increase gradually with time.
  • The realizable value of the assets is the scrap value of the assets at every time period.
  • The amount of revenue that is being generated from using the assets is deferred to decide the period at which the assets can be replaced.

Asset Replacement Cost

The amount of money that the business must spend to be able to replace the essential assets like the lien, investment security, real estate, or any other property is called the asset replacement cost.

There are many various external factors like the demand, expenses, and market value which can easily fluctuate the replacement cost which is also known as the replacement value.

When the replacement valuation is done by the business it comes out to be an expensive decision and with the help of such valuation can analyze the net present value. The NPV helps to ascertain the inflows and outflows of cash which helps in making the business decisions of purchase.

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The cost of replacing an asset is variant by nature which depends upon its external factors. The companies while deciding the asset replacement principles need to first look at the cost of depreciation and the net present value to determine the cost in relation to the expense. It decides to replace only an essential asset that is priced at equal value.

The company first needs to decide the discount rate and cash inflows and outflows for purchase for making any decisions related to the asset replacement principles. They must consider the depreciating costs while calculating the replacement cost of an asset. Some assets are depreciated on a straight line and others on an accelerated basis.

The business makes the decision of an asset purchase by adding the cost of a new asset to an asset account and the asset account is being depreciated during its useful life. The firms need to make a capital expenditure budget that can help them in planning for future purchases, making any payment for the new assets, and for increasing the cash inflows.

Replacement Asset Value

The asset replacement value or the replacement asset valuation is the monetary value that is needed for replacing the present assets in the plant. It should not be based on the insured value or depreciated value of the assets.

This includes the collection of the total annual maintenance costs and dividing the RAV into it and then multiplying it by 100 to give a percentage. RAV is the annual cost of maintaining a plant that will be measured against the value of the plant. The low amount of RAV makes the maintenance of the plant more effective.

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The above-written essay sample is based on Asset Replacement Principles.

Business and Finance QQI Level 5 and 6, Business Studies with Finance and Insurance QQI Level 5, Business Management QQI Level 6, Accountancy Business and Taxation QQI Level 5, Manual and Computerised Accounts QQI Level 5 Irish students can refer to this above-written essay sample to gain knowledge in writing such essays on business and for the enhancement of the writing skills. Students in Ireland often ask us to  write my thesis and they are willing to give essay help to the students you can also pay someone to do my assignment moreover you can also pay someone to take my online exam

We have assignments available on our Irish website on the Business, Finance, International Economics, and Accounting in Business Essay sample. Students can read these assignments and essay samples for getting clarity and clearing the confusion. They can hire any local professional business online essay writer for writing college essays. You can also check our learner record sample on our website.

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