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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
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.
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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- Fall '13