Replacement decides versus expansion cash flows Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,560,000. If the firm not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: a. What are the incremental cash flows for this project? Assume the new equipment has no market value after 5 years. b. Instead, suppose that Tesla Systems' business is booming and that the new machine expands the firm's capacity. If they buy new equipment, they will generate cash flows as shown in the table, but they will leave the old equipment in service, and it will continue to generate $386,000 in cash flow in each of the next five years. Now what are the incremental project cash flows? a. Calculate the incremental cash flows for this replacement decision: (Enter a positive number for a cash inflow and a negative number for a cash outflow and round all numbers to the nearest dollar.) New Equipment Old Equipment Incremental Cash Flows (4,651,000) $ 550,000 $ Year 0$ 1 $ 2 $ 3 $ 4 5 $ $ 926,000 $ 1,342,000 $ 2,222,000 $ 3,403,000 $ $ $ $ $ $ $ Data table (Click on the following icon in order to copy its contents into a spreadsheet.) New equipment Old equipment -$4,651,000 New equipment cost Year 1 2 3 4 5 Print Operating cash flows $550,000 926,000 1,342,000 2,222,000 3,403,000 Done $386,000 386,000 386,000 386,000 386,000 - X
Replacement decides versus expansion cash flows Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,560,000. If the firm not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: a. What are the incremental cash flows for this project? Assume the new equipment has no market value after 5 years. b. Instead, suppose that Tesla Systems' business is booming and that the new machine expands the firm's capacity. If they buy new equipment, they will generate cash flows as shown in the table, but they will leave the old equipment in service, and it will continue to generate $386,000 in cash flow in each of the next five years. Now what are the incremental project cash flows? a. Calculate the incremental cash flows for this replacement decision: (Enter a positive number for a cash inflow and a negative number for a cash outflow and round all numbers to the nearest dollar.) New Equipment Old Equipment Incremental Cash Flows (4,651,000) $ 550,000 $ Year 0$ 1 $ 2 $ 3 $ 4 5 $ $ 926,000 $ 1,342,000 $ 2,222,000 $ 3,403,000 $ $ $ $ $ $ $ Data table (Click on the following icon in order to copy its contents into a spreadsheet.) New equipment Old equipment -$4,651,000 New equipment cost Year 1 2 3 4 5 Print Operating cash flows $550,000 926,000 1,342,000 2,222,000 3,403,000 Done $386,000 386,000 386,000 386,000 386,000 - X
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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Transcribed Image Text:Replacement versus expansion cash flows Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,560,000. If the firm
decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table:
a. What are the incremental cash flows for this project? Assume the new equipment has no market value after 5 years.
b. Instead, suppose that Tesla Systems' business is booming and that the new machine expands the firm's capacity. If they buy new equipment, they will generate cash flows as shown in the table, but they will leave the old equipment in service, and it will continue to generate $386,000 in cash flow in
each of the next five years. Now what are the incremental project cash flows?
a. Calculate the incremental cash flows for this replacement decision: (Enter a positive number for a cash inflow and a negative number for a cash outflow and round all numbers to the nearest dollar.)
New Equipment Old Equipment
(4,651,000) $
550,000 $
926,000 $
1,342,000 $
2,222,000 $
3,403,000 $
Year
0
$
1
$
2
$
3 $
4 $
5
CA
GA
CA CA
$
99
Incremental Cash Flows
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
New equipment
Old equipment
- $4,651,000
New equipment cost
Year
1
W N
3
4
5
Print
Operating cash flows
$550,000
926,000
1,342,000
2,222,000
3,403,000
Done
$386,000
386,000
386,000
386,000
386,000
X
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