Pirelli & C. S.p.A. is considering purchasing a new rubber extrusion line that produces rolling bands, flanks, and the other products used in the process of tire manufacturing. This line will replace the existing one, which was purchased 5 years ago, at an installed cost of €400,000; it was being depreciated under straight-line amortization, and with a usable life of 5 more years. The new line costs €1,200,000 and requires €150,000 in installation costs; it has a 5-year usable life and would be depreciated under straight-line amortization, using a 5-year recovery period for the calculation. Pirelli can currently sell the existing line for €150,000 without incurring any additional costs. To support the increased business resulting from purchase of the new line, accounts receivable would increase by €400,000, inventories by €300,000, and accounts payable by €570,000. At the end of 5 years, the existing line would have a market value of zero; the new line would be sold to net €300,000 after removal and cleanup costs and before taxes. The firm is subject to a 24% tax rate. The estimated earnings before interest, taxes, depreciation, and amortization over the 5 years for both the new and the existing line are shown in the following table.

a. Calculate the initial investment associated with the replacement of the existing line by the new one.

b. Determine the operating cash flows associated with the proposed line replacement.

c. Determine the terminal cash flow expected at the end of year 5 from the proposed line replacement.

d. Depict on a timeline the incremental cash flows associated with the proposed line replacement decision.

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Year 12345 Earnings before interest, taxes, depreciation, and amortization New line Existing line 280,000 250,000 200,000 180,000 150,000 450,000 450,000 450,000 450,000 450,000