Abstract The conventional accounting practice is to write off the cost of an asset and show a loss when it is replaced by a new asset and the asset's salvage value is less than the book value. This paper shows that this accounting practice is inconsistent with the economic analysis leading to the replacement decision, if the asset's economic value before the replacement is equal to or larger than the asset's book value. The paper's logic applies to any situation where currently used assets are being challenged by more efficient replacements.
Bierman et al. (Wed,) studied this question.
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