Integrative-Determining relevant cash flows 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 $60,200; 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 $100,400 and requires $4,900 in installation costs; it has a 5-year usable life and would be depreciated on a straight-line basis. Lombard can currently sell the existing grinder for $70,300 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $39,600, inventories by $30,500, and accounts payable by $58,900. At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net $29,400 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.

Earnings before depreciation, interest, and taxes

Year New grinder Existing grinder

1 $42,600 $25,200

2 $42,600 $23,200

3 $42,600 $21,200

4 $42,600 $19,200

5 $42,600 $17,200

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 on a time line the relevant cash flows associated with the proposed grinder replacement decision.

Calculate the initial investment associated with replacement of the old machine by the new one.

Calculate the initial investment below:

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: $__________

Determine the incremental operating cash inflows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) Make sure to do for all 6 years.

Calculate the initial investment 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 $_______

(Include years 2, 3, 4, 5, and 6).

Calculate the cash flows with the new machine and the incremental cash flows below: (Round to the nearest dollar.) Make sure to also do years 2-6.

Year 1

Profit before depreciation and taxes $_______

Depreciation $_______

Net profit before taxes $_______

Taxes $_______

Net profit after taxes $_______

Operating cash inflows $_______

Incremental cash flows $_______

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 of sale of new asset $_______

Total proceeds from sale of new asset $_______

Change in working capital $_______

Terminal cash flow $_______

Depict on a time line the relevant cash flows associated with the proposed grinder replacement decision.