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.