See Screenshot for the MACRS table, and then the first table spoken to for the g

Question

See Screenshot for the MACRS table, and then the first table spoken to for the grinders is below the screenshot

New and Existing Grinder Table below

   Earnings before
depreciation, interest, and taxes      
Year   New grinder       Existing grinder
1 $42,500 $26,300
2 42,500 24,300
3 42,500 22,300
4 42,500 20,300
5 42,500 18,300

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 S56,400; 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 $107,200 and requires $5,200 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 $70,500 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $40,100, inventories by $30,100, and accounts payable by $58,300. At the end of 5 years, the existing grinder would have a market value o zero, the new grinder would be sold to net $28,100 after removal and cleanup costs and before taxes. The firm s 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 incremental operating cash inflows associated with the proposed c. Determine the terminal cash flow expected at the end of year 5 from the d. Depict on a time line the relevant cash flows associated with the proposed g Data Table a. Calculate the initial investment associated with replacement of the old machine Calculate the initial investment below: (Round to the nearest dollar.) (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Cost of new asset Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Installation costs Total cost of new asset Percentage by recovery year* Recovery year 3 years 33% 45% 15% 5 years 7 years 14% 25% 18% 12% 9% 3% 9% 4% 10 years 10% 18% 14% 12% Proceeds from sale of old asset Tax on sale of old asset Total proceeds, sale of old asselt Change in working capital Initial investment 19% 12% 12% 5% 8% 8% 6% 4% 100% Enter any number in the edit fields and then click Check Answer 10 Totals 100% 100% 100% remaining

Explanation / Answer

1-

cost of new grinder

107200

Cost of old grinder

56400

Year

MACRS rate

cost of new machine

Depreciation on new machine = cost * MACRS rate

installation cost

5200

accumulated depreciation

(20+32) = 52%

29328

1

20%

112400

22480

total cost of new asset

112400

Book value of old grinder

27072

2

32%

112400

35968

sale proceeds of old grinder

70500

3

19%

112400

21356

proceeds from sale of old machine

70500

gain on sale of old grinder

70500-27072

43428

4

12%

112400

13488

tax on sale of old machine

17331.2

tax on gain on sale of old grinder

43328*40%

17331.2

5

12%

112400

13488

total proceeds from sale of old machine

53168.8

Year

MACRS rate

cost of old machine

depreciation on old machne = cost of machine* Macrs rate

change in working capital

40100+30100-58300

11900

3

19%

56400

10716

4

12%

56400

6768

Initial investment

47331

5

12%

56400

6768

6

5%

56400

2820

7

0%

56400

0

2-

Incremental operating cash flow

Year

EBDIT of new machine

EBDIT of old machine

incremental EBDIT

less diffrential depreciation

EBIT

after tax earning =EBIT*(1-tax rate)

Earning after tax defore depreciation = incremental operating cash flow = after tax earning+differential depreciation

Year

Depreciation on new machine = cost * MACRS rate

depreciation on old machne = cost of machine* Macrs rate

Differential depreciation

1

42500

26300

16200

11764

4436

2661.6

14425.6

1

22480

10716

11764

2

42500

24300

18200

29200

-11000

-6600

22600

2

35968

6768

29200

3

42500

22300

20200

14588

5612

3367.2

17955.2

3

21356

6768

14588

4

42500

20300

22200

10668

11532

6919.2

17587.2

4

13488

2820

10668

5

42500

18300

24200

13488

10712

6427.2

19915.2

5

13488

0

13488

3-

sale proceeds of new grinder

28100

Book value of new grinder

112400-(112400*95%)

5620

gain on sale of new machine

22480

tax on gain on sale of old machine

22480*40%

8992

after tax sale proceeds from new machine

28100-8992

19108

recovery of working capital

11900

terminal cash flow from sale of new machine

31008

4-

Year

0

1

2

3

4

5

cash outflow

-47331

net operating cash flow

14425.6

22600

17955.2

17587.2

50923.2

50923.2 = 19915.2+31008

Accumulated depreciation on new machine

95%

1-

cost of new grinder

107200

Cost of old grinder

56400

Year

MACRS rate

cost of new machine

Depreciation on new machine = cost * MACRS rate

installation cost

5200

accumulated depreciation

(20+32) = 52%

29328

1

20%

112400

22480

total cost of new asset

112400

Book value of old grinder

27072

2

32%

112400

35968

sale proceeds of old grinder

70500

3

19%

112400

21356

proceeds from sale of old machine

70500

gain on sale of old grinder

70500-27072

43428

4

12%

112400

13488

tax on sale of old machine

17331.2

tax on gain on sale of old grinder

43328*40%

17331.2

5

12%

112400

13488

total proceeds from sale of old machine

53168.8

Year

MACRS rate

cost of old machine

depreciation on old machne = cost of machine* Macrs rate

change in working capital

40100+30100-58300

11900

3

19%

56400

10716

4

12%

56400

6768

Initial investment

47331

5

12%

56400

6768

6

5%

56400

2820

7

0%

56400

0

2-

Incremental operating cash flow

Year

EBDIT of new machine

EBDIT of old machine

incremental EBDIT

less diffrential depreciation

EBIT

after tax earning =EBIT*(1-tax rate)

Earning after tax defore depreciation = incremental operating cash flow = after tax earning+differential depreciation

Year

Depreciation on new machine = cost * MACRS rate

depreciation on old machne = cost of machine* Macrs rate

Differential depreciation

1

42500

26300

16200

11764

4436

2661.6

14425.6

1

22480

10716

11764

2

42500

24300

18200

29200

-11000

-6600

22600

2

35968

6768

29200

3

42500

22300

20200

14588

5612

3367.2

17955.2

3

21356

6768

14588

4

42500

20300

22200

10668

11532

6919.2

17587.2

4

13488

2820

10668

5

42500

18300

24200

13488

10712

6427.2

19915.2

5

13488

0

13488

3-

sale proceeds of new grinder

28100

Book value of new grinder

112400-(112400*95%)

5620

gain on sale of new machine

22480

tax on gain on sale of old machine

22480*40%

8992

after tax sale proceeds from new machine

28100-8992

19108

recovery of working capital

11900

terminal cash flow from sale of new machine

31008

4-

Year

0

1

2

3

4

5

cash outflow

-47331

net operating cash flow

14425.6

22600

17955.2

17587.2

50923.2

50923.2 = 19915.2+31008

Accumulated depreciation on new machine

95%

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