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

$62,400;

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

$105,800

and requires

$5,100

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

$69,000

without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by

$39,100,

inventories by

$30,400,

and accounts payable by

$58,100.

At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net

$28,200

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

21%

tax rate. The estimated earnings before depreciation, interest, and taxes over the five years for both the new and the existing grinder are shown in the following table

LOADING...

.

(Table

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contains the applicable MACRS depreciation percentages.)

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

b. Determine the periodic cash flows 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 net incremental cash flows associated with the proposed grinder replacement decision.