Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was purchased 2 years ago at an installed cost of $55,300; it was being depreciated straight-line for 5 years. The existing grinder is expected to have a usable life of 5 more years. The new grinder costs $105,800 and requires $4,500 in installation costs; it has a 5-year usable life andwould be depreciated on a straight-line basis. Lombard can currently sell the existing grinder for $70,900 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $40,400, inventories by $29,000, and accounts payable by $57,600. At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net $29,200 after removal and cleanup costs and before taxes. The firm is subject a 40% tax rate. The estimated earnings before depreciation, interest, and taxes over the 5 years for both the new and the existing grinder are shown in the following table
Year New grinder Existing grinder 1 $43,600 $25,200 2 43600 23200 3 43600 21200 4 43600 19200 5 43600 17200
a. Calculate the initial investment associated with replacement of the old machine by the new one.
Calculate the initial investment below: (Round to the nearest dollar.)
Cost of new asset:
Installation costs:
Total cost of new asset:
Proceeds from sale of old asset:
Tax on sale of old asset:
Total proceeds, sale of old asset:
Change in working capital:
Initial investment:
b. Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.)
Calculate the cash flows with the old machine below: (Round to the nearest dollar.)
Year
1
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
(Round to the nearest dollar.)
Year
2
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
(Round to the nearest dollar.)
Year
3
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
(Round to the nearest dollar.)
Year
4
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
(Round to the nearest dollar.)
Year
5
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
(Round to the nearest dollar.)
Year
6
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
Net profit after taxes
$
Operating cash inflows
$
Calculation the cash flows with the new machine and the incremental cash flows below: (Round to the nearest dollar.)
Year
1
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
Incremental cash flows
$
(Round to the nearest dollar.)
Year
2
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
Incremental cash flows
$
(Round to the nearest dollar.)
Year
3
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
Incremental cash flows
$
(Round to the nearest dollar.)
Year
4
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
Incremental cash flows
$
(Round to the nearest dollar.)
Year
5
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
Incremental cash flows
$
(Round to the nearest dollar.)
Year
6
Profit before depreciation and taxes
$
Depreciation
$
Net profit before taxes
$
Taxes
$
Net profit after taxes
$
Operating cash inflows
$
Incremental cash flows
$
c. Determine the terminal cash flow expected at the end of year 5 from the proposed grinder replacement.
Calculate the terminal cash flow below: (Round to the nearest dollar.)
Proceeds from sale of new asset
$
Tax on sale of new asset
Total proceeds from sale of new asset
$
Change in working capital
Terminal cash flow
$
d. Depict on a time line the relevant cash flows associated with the proposed grinder replacement decision.
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