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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
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 $1,542,000. 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 $389,000 in cash flow in each of the next five years. Now what are the incremental project cash flows? Year New Equipment Old Equipment Incremental Cash Flows 0 $ (4,655,000) $ $ 1 S 562,000 $ $ 2 $ 918,000 $ S 3 4 $ 1,344,000 $ $ 4 $ 2,219,000 $ $
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