Expansion versus replacement cash flows Tesla Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Project A Project B Initial investment −$4,646,000 $1,553,000* Year Operating cash flows 1 $562,000 $390,000 2 915,000 390,000 3 1,343,000 390,000 4 2,218,000 390,000 5 3,405,000 390,000 *After-tax cash inflow expected from liquidation. a. If Project A, which requires an initial investment of −$4,646,000, is a replacement for Project B and the $1,553,000 initial investment shown for Project B is the after-tax cash inflow expected from liquidating it, what would be the net 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.
Expansion versus replacement cash flows Tesla Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the following table. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Project A Project B Initial investment −$4,646,000 $1,553,000* Year Operating cash flows 1 $562,000 $390,000 2 915,000 390,000 3 1,343,000 390,000 4 2,218,000 390,000 5 3,405,000 390,000 *After-tax cash inflow expected from liquidation. a. If Project A, which requires an initial investment of −$4,646,000, is a replacement for Project B and the $1,553,000 initial investment shown for Project B is the after-tax cash inflow expected from liquidating it, what would be the net 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.
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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Question
Expansion versus replacement cash flows Tesla Systems has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the following table. (Click on the icon here
in order to copy the contents of the data table below into a spreadsheet.)
|
|
Project A
|
Project B
|
|
Initial investment
|
−$4,646,000
|
$1,553,000*
|
|
Year
|
Operating cash flows
|
|
|
1
|
$562,000
|
$390,000
|
|
2
|
915,000
|
390,000
|
|
3
|
1,343,000
|
390,000
|
|
4
|
2,218,000
|
390,000
|
|
5
|
3,405,000
|
390,000
|
*After-tax cash inflow expected from liquidation.
a. If Project A, which requires an initial investment of
−$4,646,000,
is a replacement for Project B and the
$1,553,000
initial investment shown for Project B is the after-tax cash inflow expected from liquidating it, what would be the net 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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