Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 11, Problem 11.3P
Replacement versus expansion cash flows Tesla Systems has estimated the cash flows over the 5-year lives for two projects A and 8 These cash flows are summarized in the table below
| Project A | Project B | |
| Initial investment | –$4,650,000 | $1,550,000 |
| Year | Operating cash inflows | |
| 1 | $ 560,000 | $380,000 |
| 2 | 925,000 | 380,000 |
| 3 | 1,350,000 | 380,000 |
| 4 | 2,225,000 | 380,000 |
| 5 | 3,400,000 | 380,000 |
- a. If project A, which requires an initial investment of $4,650,000, is a replacement for project 8 and the $1,550,000 initial investment shown for project 8 is the after-tax
cash inflow expected from liquidating project 8, what would be the net cash flows for this replacement decision? - b. Instead, if project A is an expansion decision, what would be the net cash flows and how can it be viewed as a special form of a replacement decision? Explain.
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Expansion versus replacement cash flows Tesla 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. (Click on the icon here
in order to copy the contents of the data table below into a spreadsheet.)
Project A
Project B
Initial investment
−$4,646,000
$1,553,000*
Year
Operating cash flows
1
$562,000
$390,000
2
915,000
390,000
3
1,343,000
390,000
4
2,218,000
390,000
5
3,405,000
390,000
*After-tax cash inflow expected from liquidation.
a. If Project A, which requires an initial investment of
−$4,646,000,
is a replacement for Project B and the
$1,553,000
initial investment shown for Project B is the after-tax cash inflow expected from liquidating it, what would be the net cash flows for this replacement decision?
b. How can an expansion decision such as project A be viewed as a special form of a…
Net cash flow and timeline depiction For each of the following projects, determine the net cash flows, and depict the cash flows on a time line.
a. A project that requires an initial investment of
$123,000
and will generate annual operating cash inflows of
$22,000
for the next
18
years. In each of the
18
years, maintenance of the project will require a
$4,800
cash outflow.
b. A new machine with an installed cost of
$87,000.
Sale of the old machine will yield
$31,000
after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by
$22,000
in each year of a
6-year
period. At the end of year
6,
liquidation of the new machine will yield
$17,000
after taxes, which is
$10,000
greater than the after-tax proceeds expected from the old machine had it been retained and liquidated at the end of year
6.
c. An asset that requires an initial investment of
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Cash Payback Period, Net Present Value Method, and Analysis
Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:
Year
Plant Expansion
Retail Store Expansion
1
$162,000
$135,000
2
132,000
159,000
3
114,000
109,000
4
103,000
76,000
5
33,000
65,000
Total
$544,000
$544,000
Each project requires an investment of $294,000. A rate of 10% has been selected for the net present value analysis.
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5
0.747
0.621
0.567
0.497
0.402
6
0.705
0.564
0.507
0.432
0.335
7
0.665
0.513
0.452
0.376
0.279
8
0.627
0.467
0.404
0.327
0.233
9
0.592
0.424
0.361
0.284
0.194
10
0.558
0.386
0.322
0.247
0.162
Required:
1a. Compute the cash payback period for each project.
Cash Payback…
Chapter 11 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 11.1 - Prob. 11.1RQCh. 11.1 - What three types of net cash flows may exist for a...Ch. 11.1 - Prob. 11.3RQCh. 11.1 - Prob. 11.4RQCh. 11.2 - Explain how to use each of the following inputs to...Ch. 11.2 - How do you calculate the book value of an asset?Ch. 11.2 - Prob. 11.7RQCh. 11.2 - Prob. 11.8RQCh. 11.3 - Prob. 11.9RQCh. 11.3 - Prob. 11.10RQ
Ch. 11.4 - Explain how the terminal cash flow is calculated...Ch. 11 - Book value, taxes, and initial investment Irvin...Ch. 11 - If Halley Industries reimburses employees who earn...Ch. 11 - Iridium Corp. has spent 3.5 billion over the past...Ch. 11 - Prob. 11.3WUECh. 11 - Prob. 11.4WUECh. 11 - Prob. 11.5WUECh. 11 - Prob. 11.1PCh. 11 - Net cash flow and time line depiction For each of...Ch. 11 - Replacement versus expansion cash flows Tesla...Ch. 11 - Sunk costs and opportunity costs Masters Golf...Ch. 11 - Prob. 11.5PCh. 11 - Prob. 11.6PCh. 11 - Prob. 11.7PCh. 11 - Book value and taxes on sale of assets Troy...Ch. 11 - Prob. 11.9PCh. 11 - Prob. 11.10PCh. 11 - Calculating initial investment Vastine Medical...Ch. 11 - Prob. 11.12PCh. 11 - Prob. 11.13PCh. 11 - Prob. 11.14PCh. 11 - Prob. 11.15PCh. 11 - Prob. 11.16PCh. 11 - Prob. 11.17PCh. 11 - Prob. 11.18PCh. 11 - Prob. 11.19PCh. 11 - Prob. 11.20PCh. 11 - Prob. 11.21PCh. 11 - Prob. 11.22PCh. 11 - Net cash flows for a marketing campaign Marcus...Ch. 11 - Net cash flows: No terminal value Central Laundry...Ch. 11 - Prob. 11.25PCh. 11 - Ethics Problem Cash flow projections are a central...
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