Question
I need help answering this question using the Straight-line method NOT MACRS: Lombard Company is contemplating the purchase of a new high-speed widget grinder to
I need help answering this question using the Straight-line method NOT MACRS:
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 $60,000; it was being depreciated under the straight-line method. The existing grinder is expected to have a usable life of 5 more years. The new grinder costs $105,000 and requires $5,000 in instillation costs; it has a 5-year useable life and would be depreciated under the straight-line method. Lombard can currently sell the existing grinder for $70,000 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $40,000, inventories by $30,000, and accounts payable by $58,000. At the end of 5 years, the existing grinder is expected to have a market value of zero; the new grinder would be sold to net $29,000 after removal and cleanup costs and before taxes. The firm is subject to a 40% tax rate. The estimated earnings before depreciation, interest, and taxes over the 5 years for both the new and existing grinder are shown in the following table.
Year | New Grinder | Existing Grinder |
---|---|---|
1 | $43,000 | $26,000 |
2 | 43,000 | 24,000 |
3 | 43,000 | 22,000 |
4 | 43,000 | 20,000 |
5 | 43,000 | 18,000 |
a. Calculate the initial investment associated with the replacement of the existing grinder by the new one.
b. Determine the incremental operating cash inflows associated with the proposed grinder replacement.
c. Determine the terminal cash flow expected at the end of year 5 from the proposed grinder replacement.
d. Depict the time line the relevant cash flows associated with the proposed grinder replacement decision.
Thank you!
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