Return on Software: Maximizing the Return on Your Software Investment

After-Tax Analysis of Replacements

Income taxes have some special effects on replacement decisions (Chapter 12). Specifically, keeping an already-owned asset incurs the opportunity cost (remember the discussion about the “outsider's viewpoint”), and it also defers possible depreciation recapture. The replacement alternatives (the challengers) might lead to tax credits in some cases. As well, the depreciation schedule needs to be determined so that tax effects of eventual scrapping or salvage can be identified. Replacement analysis needs to be done in after-tax terms or the wrong decision could be made.