Chapter 11, Problem 11.3P

Replacement versus expansion cash flows Tesla Systems has estimated the cash flows over the 5-year lives for two projects A and 8 These cash flows are summarized in the table below

	Project A	Project B
Initial investment	–$4,650,000	$1,550,000
Year	Operating cash inflows
1	$ 560,000	$380,000
2	925,000	380,000
3	1,350,000	380,000
4	2,225,000	380,000
5	3,400,000	380,000

1. a. If project A, which requires an initial investment of $4,650,000, is a replacement for project 8 and the $1,550,000 initial investment shown for project 8 is the after-tax cash inflow expected from liquidating project 8, what would be the net cash flows for this replacement decision?
2. b. Instead, if project A is an expansion decision, what would be the net cash flows and how can it be viewed as a special form of a replacement decision? Explain.