Expansion versus replacement cash flows Edison Systems has estimated the cash fl

Question

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 tollowing table. (Click on the icon located on the top-night corner of the data table below in order to copy its contents into a spreadsheet) Project A $39,400 Project B $11,200 Initial investment Year Operating cash flows $10.100 1,700 3,100 16.600 10,500 After-tax cash infow expected from liquidation. $5,700 5,700 5,700 5,700 5.700

Explanation / Answer

Soln : Relevant cash flows are the cash flows , which come into the picture as incremental cash flows after replacing the project and the cash flows which exist, if you do replacement or not it does not matter, them those cash flows are not relevant.

Here We have calculated accordingly, like for initial investment flow = Initial investment to acquire project - After tax cash flow of liquidating.

Operating cash flows calculated by subtracting cash flows of old from new project.

(b) Option D is correct, as any expansion project if considered and in an old asset the cash inflows are equivalent to 0, it is as good as replacement, as liquidating the old asset is better option.

Year Project A Project B Relevant Cash Flows 0 39400 11200 28200 1 10100 5700 4400 2 11700 5700 6000 3 13100.00 5700 7400 4 16600 5700 10900 5 10500 5700 4800

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