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Sentry Company is contemplating the purchase of a new high - speed grinder to replace the existing grinder. The existing grinder was purchased 2 years
Sentry Company is contemplating the purchase of a new highspeed grinder to replace the existing grinder. The existing grinder was purchased years ago at an installed cost of $; it is being depreciated under MACRS using a year recovery period. The existing grinder is expected to have a usable life of more years
hint: start depreciation expense in year since the existing grinder was purchased two years ago.
The new grinder costs $ and requires $ of installation costs; it has a year usable life and would be depreciated under MACRS using a year recovery period.
The existing grinder can currently be sold for $ without incurring any removal or cleanup costs. To support the increased business resulting from the purchase of the new grinder, the following would increase by respective amounts: accounts receivable by $ inventories by $ and accounts payable by $ At the end of years, the existing grinder is expected to have a market value of zero; the new grinder would be sold to net $ after removal and cleanup costs and before taxes. The firm pays percent taxes on both ordinary income and capital gains.
The estimated profits before depreciation and taxes over the year for both the new and existing grinder are shown in the following table:
EBITDA
YearNew GrinderExisting Grinder
$$
aCalculate the initial investment associated with the replacement of the existing grinder by the new one.
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bDetermine the incremental operating cash inflows associated with the proposed grinder replacement.
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cDetermine the terminal cash flow expected at the end of year from the proposed grinder replacement.
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dDepict on a time line the relevant cash flows associated with the proposed grinder replacement decision.
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eCalculate Payback, IRR, NPV assuming cost of capital of and MIRR assuming a reinvestment rate of
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fExplain the difference between Modified Internal Rate of Return MIRR and IRR.
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gState and explain your recommendation on proposed capital expenditure.
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