Expansion versus replacement cash flows Stable Nuclear Plant Corporation 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. If project A were actually a replacement for project B and the $38,000 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? How can an expansion decision such as project A be viewed as a special form of a replacement decision? Explain.
Expansion versus replacement cash flows Stable Nuclear Plant Corporation 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. If project A were actually a replacement for project B and the $38,000 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? How can an expansion decision such as project A be viewed as a special form of a replacement decision? Explain.
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
Problem 1PS
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Expansion versus replacement cash flows Stable Nuclear Plant Corporation 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.
- If project A were actually a replacement for project B and the $38,000 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? - How can an expansion decision such as project A be viewed as a special form of a replacement decision? Explain.
Transcribed Image Text:Project A
Project B
Initial investment
S60,000
$38,000
Year
Operating cash inflows
1
$20,000
$14,000
2
18,000
12,000
3
16,000
13,000
4
12,000
8,000
5
10,000
6,000
"After-tax cash inflow expected from liquidation.
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