Quiz:ch 11-2 Quiz Integrative—Determining relevant cash flows

Determining relevant cash flows

Integrative—Determining relevant cash flows   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 $60,300​; 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 $106,100 and requires $5,200 in installation​ costs; it has a​ 5-year usable life andwould be depreciated under MACRS using a​ 5-year recovery period. Lombard can currently sell the existing grinder for $70,800 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new​ grinder, accounts receivable would increase by $39,900​, inventories by $30,400​, and accounts payable by $58,700. At the end of 5​ years, the existing grinder would have a market value of​ zero; the new grinder would be sold to net $29,800 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 LOADING…. ​(Table LOADING… contains the applicable MACRS depreciation​ percentages.)a. Calculate the initial investment associated with the replacement of the existing grinder by the new one.b. Determine the incremental operating cash inflows associated with the proposed grinder replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)c. Determine the terminal cash flow expected at the end of year 5 from the proposed grinder replacement.d. Depict on a time line the relevant cash flows associated with the proposed grinder replacement decision.a. Calculate the initial investment associated with replacement of the old machine by the new one.Calculate cash flow the initial investment​ below:  ​(Round to the nearest​ dollar.)

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