Expansion versus replacement cash flows

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Reference no: EM131556358

Expansion versus replacement cash flows Edison 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 below.

Project A Project B

Initial Investment $40,000 $12,000

Year Operating Cash Inflows

1 $10,000 $6,000

2 12,000 6,000

3 14,000 6,000

4 16,000 6,000

5 10,000 6,000

after-tax cash inflow expected from liquidation

a. If project A were actually a replacement for project B and the $12,000 initial investment shown for B were the after-tax can inflow expected from liquidating it, what would be the relevant 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.

Reference no: EM131556358

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