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Is capital spend forgone a relevant cashflow?

Relevant Cash Flows in Investment Appraisals

Is it appropriate to include capital spend not spent as a result of a project as an opportunity saving in a capital apprisal model? For example, a bolier needs to be replaced at a cost of £5k but a project has been brought forward which proposes to purchase a biomass bolier for £7k which will secure incentives of £0.5k per annum. Is it appropriate to include the £5k that you would not need to spend on a conventional bolier as an opportunity saving?

 

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11th Jan 2019 09:25

In certain circumstances, yes.

Was this biomass boiler going to be bought anyway at some time in the future ? If so, when ?

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11th Jan 2019 09:36

The current boiler needs replacing but there had not previously been any decision to replace it with a biomass bolier. This proposal has recently come forward.

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to philevans2003
11th Jan 2019 09:45

So you'd've had to spend £5k anyway.

The decision is therefore spending an extra £2k to get the extra benefits of biomass.

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11th Jan 2019 09:50

Yes, that was my view. Thanks.

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