Reference no: EM13828785
Expansion versus replacement cash flows Edison Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below.
Project A Project B
Project A Initial investment $40,000 and Project B Initial investment $12,000a
Year Operating cash inflows
Year 1 - Project A $10,000 and Project B $ 6,000
Year 2 - Project A 12,000 and Project B 6,000
Year 3 - Project A 14,000 and Project B 6,000
Year 4 - Project A 16,000 and Project B 6,000
Year 5 - Project A 10,000 and Project B 6,000
After-tax cash inflow expected from liquidation.
a. If project A were actually a replacement for project B and the $12,000 initial investment shown for project B were the after-tax cash inflow expected from liquidating it, what would be the relevant cash flows for this replacement decision?
b. How can an expansion decision such as project A be viewed as a special form of a replacement decision? Explain.
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