=+LG 3 LG 4 P11–25 Integrative: Determining net cash flows Pirelli & C. S.p.A. is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and the other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 5 years ago, at an installed cost of €400,000; it was being depreciated under straight-line amortization, and with a usable life of 5 more years.

The new line costs €1,200,000 and requires €150,000 in installation costs; it has a 5-year usable life and would be depreciated under straight-line amortization, using a 5-year recovery period for the calculation. Pirelli can currently sell the existing line for €150,000 without incurring any additional costs. To support the increased business resulting from purchase of the new line, accounts receivable would increase by €400,000, inventories by €300,000, and accounts payable by €570,000. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net €300,000 after removal and cleanup costs and before taxes. The firm is subject to a 24% tax rate. The estimated earnings before interest, taxes, depreciation, and amortization over the 5 years for both the new and the existing line are shown in the following table.