Expansion versus replacement cash flowsTesla 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	$4,650,000	$1,555,000*
Year	Operating cash flows
1	$570,000	$390,000
2	915,000	390,000
3	1,351,000	390,000
4	2,220,000	390,000
5	3,402,000	390,000

*After-tax cash inflow expected from liquidation.

a. If Project A, which requires an initial investment of

$4,650,000,

is a replacement for Project B and the

$1,555,000

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.

Question content area bottom

Part 1

a. Calculate the relevant cash flows for this replacement decision:(Round to the nearest dollar.)

	Relevant
Year	Cash Flows
0	$
1	$
2	$
3	$
4	$
5	$

Part 2

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.)

A.

A replacement project is simply an expansion decision in which all cash flows are the incremental cash flows.

B.

An expansion project is simply a replacement decision in which all cash flows from the old asset are zero.

C.

An expansion project is simply a replacement decision in which all relevant cash flows are the incremental cash flows.

D.

A replacement project is simply an expansion decision in which all cash flows from the old asset are zero.