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Part $1$

Integrativelong dash

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 $ $60$ comma $100$

$$;

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 $ $106$ comma $300$

and requires $ $4$ comma $600$

in installation$$ costs; it has a$5-$year usable life and

would be depreciated on a$$ straight$-$line basis. Lombard can currently sell the existing grinder for $ $69$ comma $900$

without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new$$ grinder, accounts receivable would increase by $ $39$ comma $500$

$,$

inventories by $ $29$ comma $300$

$,$

and accounts payable by $ $58$ comma $000$

$.$

At the end of $5$ years, the existing grinder would have a market value of$$ zero; the new grinder would be sold to net $ $30$ comma $000$

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

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$.$

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.

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