DEFINITION of 'Replacement Chain Method'
A capital budgeting decision model that is used to compare two or more mutually exclusive capital proposals with unequal lives. The Replacement Chain Method is a decision model that takes into consideration the different life spans of alternative proposals, allowing a more accurate comparison of the proposals. In Replacement Chain Analysis, the Net Present Value (NPV) is determined for each proposal, and one or more iterations (the "links" in the replacement chain) can be completed to create comparable time frames for the proposals. By comparing the proposals over likeperiods of time, acceptreject information for the various proposals becomes more reliable.
INVESTOPEDIA EXPLAINS 'Replacement Chain Method'
The methodology involves determining the number of years of cash flow (the project lives) for each of the projects and creating a "replacement chain," or iterations, to fill in the blanks in the shorterlived project. For example, if project A has a fiveyear life span and project B has a 10year life span, project A's data can be projected to the next fiveyear period to match project B's 10year life span, taking into consideration any net investments and net cash flows for each iteration. The NPV of each project can then be calculated to provide reliable acceptreject information. The NPV is the present value of the net cash flow stream resulting from a project, discounted at the firm's cost of capital, less the project's net investment.

Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Incremental Cost Of Capital
A term used in capital budgeting, the incremental cost of capital ... 
Cost Of Equity
In financial theory, the return that stockholders require for ... 
Capital Budgeting
The process in which a business determines whether projects such ... 
Weighted Average Cost Of Capital ...
A calculation of a firm's cost of capital in which each category ... 
Operating Cost
Expenses associated with administering a business on a day to ...

What's the difference between net present value and internal rate of return? How ...
Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ... Read Full Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >> 
How does transfer pricing help business?
Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >> 
How do I calculate my effective tax rate using Excel?
Your effective tax rate can be calculated using Microsoft Excel through a few standard functions and an accurate breakdown ... Read Full Answer >> 
How important are contingent liabilities in an audit?
Contingent liabilities, when present, are very important audit items because they normally represent risks that are easily ... Read Full Answer >> 
How does quantifying fixed overhead volume variance show whether a company is profitable ...
Fixed overhead volume cannot definitively prove a company is profitable, but it can be used to provide an excellent indication ... Read Full Answer >>

Investing Basics
Explaining WriteDowns
A writedown is a reduction in the book value of an asset because it is overvalued compared to the market value. 
Economics
How to Do a CostBenefit Analysis
The benefits of a given situation or businessrelated action are summed and then the costs associated with taking that action are subtracted. 
Economics
What are Noncurrent Assets?
Noncurrent assets are property that a company owns that will last for more than one year. 
Investing Basics
How Much Do CPAs Make?
If you're considering becoming a CPA, here's what you might expect to earn. 
Economics
Explaining ActivityBased Costing
Activitybased costing (ABC) is a managerial accounting method that assigns certain indirect costs to the products incurring the bulk of those costs. 
Economics
What is a Contra Account?
A contra account is an offset that reduces the value of a related account. 
Economics
Modified Internal Rate of Return (MIRR)
Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation. 
Fundamental Analysis
What is Quantitative Analysis?
Quantitative analysis refers to the use of mathematical computations to analyze markets and investments. 
Economics
Explaining Residual Value
Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life. 
Fundamental Analysis
Why Last In First Out Is Banned Under IFRS
We explain why LastInFirstOut is banned under IFRS