C an asset that requires an initial investment of 2

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Unformatted text preview: overhaul requiring an additional cash outlay of $500,000 will be required. The asset’s liquidation value at the end of year 10 is expected to be $0. LG3 8–4 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 following table. Project A Initial investment Year Project B $40,000 $12,000a 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 aAfter-tax cash inflow expected from liquidation. a. If project A were actually a replacement for project B and if the $12,000 initial investment shown for project B were the after-tax cash 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. LG3 8–5 Sunk costs and opportunity costs Masters Golf Products, Inc., spent 3 years and $1,000,000 to develop its new line of...
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