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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. a. If project A were actually a replacement for project B and if the $12,000 initial investment shown for proiect R were the after-tax cash inflo w expected

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. a. If project A were actually a replacement for project B and if the $12,000 initial investment shown for proiect R were the after-tax cash inflo w expected

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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. a. If project A were actually a replacement for project B and if 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. Project A Project B Initial investment S40,000 S12,000 Year Opcrating cash inflows $10,000 $ 6,000 6,000 6,000 12,000 14,000 4 16,000 6,000 10,000 6,000 "After-tax cash inflow expected from liquidation. 123 +5
Transcribed Image Text: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. a. If project A were actually a replacement for project B and if 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. Project A Project B Initial investment S40,000 S12,000 Year Opcrating cash inflows $10,000 $ 6,000 6,000 6,000 12,000 14,000 4 16,000 6,000 10,000 6,000 "After-tax cash inflow expected from liquidation. 123 +5
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