P11-25 Integrative: Determining net cash flows Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the easting grinder. The existing grinder was purchased 2 years ago at an installed cost of $60.000: it was being depreciated under MACRS, using a 5-year recovery peniod. The existing grinder is expected to have a usable life of 5 more years. The new $105,000 and requires $5,000 in installation costs: it has a 5-year usable life and would be depreciated under MACRS, using a S-year recovery period. Lombard can currently sell the existing grinder for $70.000 without incurring any removal or cdeanup costs. To support the increased business resulting from purchase of the new grindet, 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 would have a market value of zero; the new grinder would be sold to net $29,000 after removal and cdleanup costs and before taxes. The firm is subject to a 40% tax rate. The estimated earnings before interest, taxes, depreciation, and amortization over the 5 years for both the new and the existing grinder are shown in the following table. (See Table 4.20 for the applicable depreciation percentages.) grinder costs Earnings before interest, taxes, depreciation, and amortization Year New grinder $43,000 43.000 Existing grinder $26,000 24,000 22,000 2 43,000 43.000 43,000 20,000 18.000 a. Calculate the initial investment associated with the replacement of the existing grinder by the new one. b. Determine the operating cash flows associated with the proposed grinder c. Determine the terminal cash flow expected at the end of year 5 from the d. Depict on a timeline the net cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) proposed grinder replacement. grinder replacement decision. P11-25 Integrative: Determining net cash flows Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the easting grinder. The existing grinder was purchased 2 years ago at an installed cost of $60.000: it was being depreciated under MACRS, using a 5-year recovery peniod. The existing grinder is expected to have a usable life of 5 more years. The new $105,000 and requires $5,000 in installation costs: it has a 5-year usable life and would be depreciated under MACRS, using a S-year recovery period. Lombard can currently sell the existing grinder for $70.000 without incurring any removal or cdeanup costs. To support the increased business resulting from purchase of the new grindet, 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 would have a market value of zero; the new grinder would be sold to net $29,000 after removal and cdleanup costs and before taxes. The firm is subject to a 40% tax rate. The estimated earnings before interest, taxes, depreciation, and amortization over the 5 years for both the new and the existing grinder are shown in the following table. (See Table 4.20 for the applicable depreciation percentages.) grinder costs Earnings before interest, taxes, depreciation, and amortization Year New grinder $43,000 43.000 Existing grinder $26,000 24,000 22,000 2 43,000 43.000 43,000 20,000 18.000 a. Calculate the initial investment associated with the replacement of the existing grinder by the new one. b. Determine the operating cash flows associated with the proposed grinder c. Determine the terminal cash flow expected at the end of year 5 from the d. Depict on a timeline the net cash flows associated with the proposed replacement. (Note: Be sure to consider the depreciation in year 6.) proposed grinder replacement. grinder replacement decision
