Question
Project A Project B Initial Investment - $4,650,000 $1,550,000 Year Operating Cash Inflows Operating Cash Inflows 1 $560,000 $380,000 2 $925,000 $380,000 3 $1,350,000 $380,000
| Project A | Project B | |
| Initial Investment | - $4,650,000 | $1,550,000 |
| Year | Operating Cash Inflows | 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 |
Replacement versus expansion 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 table above.
a. If project A, which requires an initial investment of $4,650,000, is a replacement for project B and the $1,550,000 initial investment shown for project B is the after-tax cash inflow expected from liquidating project B, what would be the net cash flows for this replacement decision?
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.
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
