What is a “replacement chain?” When and how should replacement cha

QUESTION

What is a “replacement chain?” When and how should replacement chain be used in capital budgeting ?
In Capital Budgeting, a financial analyst analyzes alternative and often mutually exclusive projects to make a selection. As it may happen, the alternative projects may differ in life span as one may be shorter in life as compared to the other. An example of this scenario would be, for example, when one has to select between two machines or pieces of equipments having different useful life. Since most machines will be obsolete after a given period of time thus it is

y that one of the machines is more duarble than the other. In such situtaions, one of the managerial options will be to replace the project after it expires. Here the task of evaluating a capital budgeting proposal with unequal or different lives is done with replacement chain analysis , method or approach in finance

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