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 - $4,645,000 $1,551,000* Year Operating cash flows 1 $569,000 $374,000 2 918,000 374,000 3 1,348,000 374,000 4 2,232,000 374,000 5 3,396,000 374,000 *After-tax cash inflow expected from liquidation. a. If Project A, which requires an initial investment of - $4,645,000, is a replacement for Project B and the $1,551,000 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. a. Calculate the relevant cash flows for this replacement decision: (Round to the nearest dollar.) Relevant Cash Flows Year 0 $ 1 N 3 $ $ $ $ $ 4 5 b. How can an expansion decision such as project A be viewed as a special form of a replacement decision? Explain. (Select the best choice below.) O A. A replacement project is simply an expansion decision in which all cash flows are the incremental cash flows. OB. An expansion project is simply a replacement decision in which all relevant cash flows are the incremental cash flows. OC. An expansion project is simply a replacement decision in which all cash flows from the old asset are zero. OD. A replacement project is simply an expansion decision in which all cash flows from the old asset are zero. 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 - $4,645,000 $1,551,000* Year Operating cash flows 1 $569,000 $374,000 2 918,000 374,000 3 1,348,000 374,000 4 2,232,000 374,000 5 3,396,000 374,000 *After-tax cash inflow expected from liquidation. a. If Project A, which requires an initial investment of - $4,645,000, is a replacement for Project B and the $1,551,000 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. a. Calculate the relevant cash flows for this replacement decision: (Round to the nearest dollar.) Relevant Cash Flows Year 0 $ 1 N 3 $ $ $ $ $ 4 5 b. How can an expansion decision such as project A be viewed as a special form of a replacement decision? Explain. (Select the best choice below.) O A. A replacement project is simply an expansion decision in which all cash flows are the incremental cash flows. OB. An expansion project is simply a replacement decision in which all relevant cash flows are the incremental cash flows. OC. An expansion project is simply a replacement decision in which all cash flows from the old asset are zero. OD. A replacement project is simply an expansion decision in which all cash flows from the old asset are zero
