# Lombard company is contemplating the purchase of a new​ high-speed

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.

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