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IntegrativeDetermining 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 $55,500; 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 $100,100 and requires $5,300 in installation costs; it has a 5-year usable life and would be depreciated under MACRS using a 5-year recovery period. Lombard can currently sell the existing grinder for $70,400 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $40,900, inventories by $29,000, and accounts payable by $57,000. At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net $29,500 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 :. (Table : 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 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. Year or A WN - Earnings before depreciation, interest, and taxes New grinder Existing grinder $42,000 $27,000 42,000 25,000 42,000 23,000 42,000 21,000 42,000 19,000 Recovery year 3 years 33% 45% 15% 7% OO voo AWN- Percentage by recovery year* 5 years 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 5% 9% 4% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 9% 9% 6% 4% 11 Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention. 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

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