Question
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
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 using the straight line method down to zero over 5 years. 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 installation costs; it has a 5- year usable life and would be depreciated using straight-line method down to 0 over 5 years.. 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 a 40% tax rate.
a. Calculate the initial investment associated with the replacement of the existing grinder by the new one.
b. Determine the terminal cash flow expected at the end of year 5 from the proposed grinder replacement.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started