Replacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: New equipment Old equipment New equipment cost -4,645,000 Year Operating cash flows 1 551,000 372,000 2 931,000 372,000 3 1,344,000 372,000 4 2,221,000 372,000 5 3,399,000 372,000 New Equipment Old Equipment New Equipment Cost -$4,645,000 Year Operating Cash Flows 1 $551,000 $372,000 2 $931,000 $372,000 3 $1,344,000 $372,000 4 $2,221,000 $372,000 5 $3,399,000 $372,000 a. What are the incremental cash flows for this project? Assume the new equipment has no market value after 5 years. Calculate the incremental cash flows for this replacement decision: (Enter a positive number for a cash inflow and a negative number for a cash outflow and round all numbers to the nearest dollar.) Year New Equipment Old Equipment Incremental Cash Flows 0 $ (4,645,000) $ $ 1 $ 551,000 $ $ 2 $ 931,000 $ $ 3 $ 1,344,000 $ $ 4 $ 2,221,000 $ $ 5 $ 3,399,000 $ $ b. Instead, suppose that Tesla Systems' business is booming and that the new machine expands the firm's capacity. If they buy new equipment, they will generate cash flows as shown in the table, but they will leave the old equipment in service, and it will continue to generate $372,000 in cash flow in each of the next five years. Now what are the incremental project cash flows?

Replacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table: New equipment Old equipment New equipment cost -4,645,000 Year Operating cash flows 1 551,000 372,000 2 931,000 372,000 3 1,344,000 372,000 4 2,221,000 372,000 5 3,399,000 372,000 New Equipment Old Equipment New Equipment Cost -$4,645,000 Year Operating Cash Flows 1 $551,000 $372,000 2 $931,000 $372,000 3 $1,344,000 $372,000 4 $2,221,000 $372,000 5 $3,399,000 $372,000 a. What are the incremental cash flows for this project? Assume the new equipment has no market value after 5 years. Calculate the incremental cash flows for this replacement decision: (Enter a positive number for a cash inflow and a negative number for a cash outflow and round all numbers to the nearest dollar.) Year New Equipment Old Equipment Incremental Cash Flows 0 $ (4,645,000) $ $ 1 $ 551,000 $ $ 2 $ 931,000 $ $ 3 $ 1,344,000 $ $ 4 $ 2,221,000 $ $ 5 $ 3,399,000 $ $ b. Instead, suppose that Tesla Systems' business is booming and that the new machine expands the firm's capacity. If they buy new equipment, they will generate cash flows as shown in the table, but they will leave the old equipment in service, and it will continue to generate $372,000 in cash flow in each of the next five years. Now what are the incremental project cash flows?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 2E

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Replacement versus expansion cash flows- Tesla Systems has estimated the cash flows over the five-year lives of a project that will install new equipment to replace old equipment. If the firm makes this investment, it will sell the old equipment and receive after-tax proceeds of $1,551,000. If the firm decides not to undertake this project, the old equipment will remain in service and generate the cash flows listed in years 1 through 5, and it will have no value after five years. These cash flows are summarized in the following table:

New equipment Old equipment
New equipment cost -4,645,000
Year Operating cash flows
1 551,000 372,000
2 931,000 372,000
3 1,344,000 372,000
4 2,221,000 372,000
5 3,399,000 372,000

	New Equipment	Old Equipment
New Equipment Cost	-$4,645,000
Year	Operating	Cash Flows
1	$551,000	$372,000
2	$931,000	$372,000
3	$1,344,000	$372,000
4	$2,221,000	$372,000
5	$3,399,000	$372,000

a. What are the incremental cash flows for this project? Assume the new equipment has no market value after 5 years.

Calculate the incremental cash flows for this replacement decision:

(Enter a positive number for a cash inflow and a negative number for a cash outflow and round all numbers to the nearest dollar.)

Year	New Equipment	Old Equipment	Incremental Cash Flows
0	$	(4,645,000)	$	$
1	$	551,000	$	$
2	$	931,000	$	$
3	$	1,344,000	$	$
4	$	2,221,000	$	$
5	$	3,399,000	$	$

b. Instead, suppose that Tesla Systems' business is booming and that the new machine expands the firm's capacity. If they buy new equipment, they will generate cash flows as shown in the table, but they will leave the old equipment in service, and it will continue to generate $372,000 in cash flow in each of the next five years. Now what are the incremental project cash flows?

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