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from $4,000 in its first year to $10,000 in its tenth and final year. The terminal
cash flow is the after-tax nonoperating cash flow occurring in the final year of the
project. It is usually attributable to liquidation of the project. In this case it is
$25,000, received at the end of the project’s 10-year life. Note that the terminal
cash flow does not include the $10,000 operating cash inflow for year 10. Expansion versus Replacement Cash Flows
Developing relevant cash flow estimates is most straightforward in the case of
expansion decisions. In this case, the initial investment, operating cash inflows,
and terminal cash flow are merely the after-tax cash outflow and inflows associated with the proposed capital expenditure.
Identifying relevant cash flows for replacement decisions is more complicated, because the firm must identify the incremental cash outflow and inflows
that would result from the proposed replacement. The initial investment in the
case of replacement is the difference between the initial investment needed to
acquire the n...
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This document was uploaded on 01/19/2014.
- Fall '13