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 $64,000; 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 $101,400 and requires $4500 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 $70800 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $41000, inventories by $30,300 and accounts payable by $58,300. At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net $30,000 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 $44,000 $25,500 2 44,000 23,500 3 44,000 21,500 4 44,000 19,500 5 44,000 17,500

a. Calculate the initial investment associated with replacement of the old machine by the new one. Calculate the initial investment below:(Round to the nearest dollar.)

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

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

Calculate the cash flows with the old machine 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	$

Year	2
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$

Year	3
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$

Year	4
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$

Year	5
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$

Year	6
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$

Calculation the cash flows with the new machine and the incremental cash flows 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	$
Incremental cash flows	$

Year	2
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$
Incremental cash flows	$

Year	3
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$
Incremental cash flows	$

Year	4
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$
Incremental cash flows	$

Year	5
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$
Incremental cash flows	$

Year	6
Profit before depreciation and taxes	$
Depreciation	$
Net profit before taxes	$
Taxes	$
Net profit after taxes	$
Operating cash inflows	$
Incremental cash flows	$

c. 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 on sale of new asset		()
Total proceeds from sale of new asset			$
Change in working capital
Terminal cash flow			$

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

The time line for the incremental operating cash inflows is shown below: