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

Project A Initial investment $40,000 and Project B Initial investment $12,000a

Year Operating cash inflows

Year 1 - Project A $10,000 and Project B $ 6,000

Year 2 - Project A 12,000 and Project B 6,000

Year 3 - Project A 14,000 and Project B 6,000

Year 4 - Project A 16,000 and Project B 6,000

Year 5 - Project A 10,000 and Project B 6,000

aAfter-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 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.