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 $55,300​; it was being depreciated​ straight-line for 5 years. The existing grinder is expected to have a usable life of 5 more years. The new grinder costs $105,800 and requires $4,500 in installation​ costs; it has a​ 5-year usable life andwould be depreciated on a​ straight-line basis. Lombard can currently sell the existing grinder for $70,900 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new​ grinder, accounts receivable would increase by $40,400​, inventories by $29,000​, and accounts payable by $57,600. At the end of 5​ years, the existing grinder would have a market value of​ zero; the new grinder would be sold to net $29,200 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

        Year New grinder  Existing grinder   1 $43,600  $25,200   2 43600  23200   3 43600  21200   4 43600  19200   5 43600  17200    

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

$

​(Round to the nearest​ dollar.)

   

Year

2

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

​(Round to the nearest​ dollar.)

   

Year

3

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

​(Round to the nearest​ dollar.)

   

Year

4

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

​(Round to the nearest​ dollar.)

   

Year

5

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

​(Round to the nearest​ dollar.)

   

Year

6

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after 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

$

​(Round to the nearest​ dollar.)

   

Year

2

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

 

Incremental cash flows

$

​(Round to the nearest​ dollar.)

   

Year

3

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

 

Incremental cash flows

$

​(Round to the nearest​ dollar.)

   

Year

4

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

 

Incremental cash flows

$

​(Round to the nearest​ dollar.)

   

Year

5

 

Profit before depreciation and taxes

$

 

Depreciation

$

 

Net profit before taxes

$

 

Taxes

$

 

Net profit after taxes

$

 

Operating cash inflows

$

 

Incremental cash flows

$

​(Round to the nearest​ dollar.)

   

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.