Unformatted text preview: etermining 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
$60,000; 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 $105,000 and requires $5,000 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 $70,000
without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would
increase by $40,000, inventories by $30,000, and accounts payable by $58,000.
At the end of 5 years, the existing grinder is expected to have a market value of
zero; the new grinder would be sold to net $29,000 after removal and cleanup
costs and before taxes. The firm pays taxes at a rate of 40%...
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