Question

Your company is considering two projects and has estimated the following cash flows:

Year Project A Project B

0 -15,000 -20,000

1 10,000 10,000

2 10,000 18,000

Attempt 1/1 for 10 pts.

Part 1

If project B expands your manufacturing capacity by building a separate factory, what is the relevant cash flow for evaluating project B in year 2?

Submit

Attempt 1/1 for 10 pts.

Part 2

If project B replaces an existing factory (project A), what is the relevant cash flow for evaluating project B in year 2?

Submit

Attempt 1/1 for 10 pts.

Part 3

If project B replaces an existing factory (project A), what is the relevant cash flow for evaluating project B in year 0?

Answer 1

Part 1) Here separate factory building is used hence cash flow of project A would not be affected by undertaking project B, hence Relevant cash flow for Project B in year 2= $18000

Part 2) If project B replaces an existing factory (project A) , then there will be no cash flow from project A, hence relevant cash flow for project B in year 2
= cash flow from project B - cash flow of project A
= 18000-10000
= $8000

Part 3) If project B replaces an existing factory (project A) , then there will be no cash flow from project A, hence relevant cash flow for project B in year 0
= cash flow from project B - cash flow of project A
= -20000 - (-15000)
=-20000 + 15000
= -5000 $