Integrativelong dashDetermining

relevant cash flowsLombard 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

$ 62 comma 600$62,600;

it was being depreciated under MACRS using a 5-year recovery period. The existing grinder is expected to have a usable life of 5 more years. The new grinder costs

$ 101 comma 000$101,000

and requires

$ 4 comma 600$4,600

in installation costs; it has a 5-year usable life and

would be depreciated under MACRS using a 5-year recovery period. Lombard can currently sell the existing grinder for

$ 69 comma 300$69,300

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 comma 800$39,800,

inventories by

$ 29 comma 900$29,900,

and accounts payable by

$ 58 comma 000$58,000.

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 comma 900$29,900

after removal and cleanup costs and before taxes. The firm is subject a

40 %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

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. (Table

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contains the applicable MACRS depreciation percentages.)

a. Calculate the initial investment associated with the replacement of the existing grinder by the new one.

b. Determine the operating cash inflows associated with the proposed grinder replacement. (Note: Be sure to consider the depreciation in year 6.)

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.