Answered: E contains the applicable MACRS…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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 $57,400; 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 $103,300 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 $69,900

without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new grinder, accounts receivable would increase by $40,800, inventories by $29,900, and accounts payable by $57,900. At the end of 5 years, the existing grinder would have a market value of zero; the new grinder would be sold to net $28,600
after removal and cleanup costs and before taxes. The firm is subject a

21% tax rate. The estimated earnings before depreciation, interest, and taxes over the five years for both the new and the existing grinder are shown in the following tables attached:

(Table 2 contains the applicable MACRS depreciation percentages.)

a. Calculate the initial cash flow associated with the replacement of the existing grinder by the new one.

b. Determine the periodic cash flows 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 net incremental cash flows associated with the proposed grinder replacement decision.

E contains the applicable MACRS depreciat
low associated with the replacement of the existing grinder byChe new one.
Jim.
sh fr
sh f
het in
jear 6.)
Data table
low
(Click on the icon here in order to copy the contents of the data table below
into a spreadsheet.)
v be
Earnings before
depreciation, interest, and taxes
Year
New grinder
Existing grinder
et
$43,900
43,900
1
$26,400
pld a
2
24,400
3
43,900
22,400
4
43,900
20,400
of old
5. /
43,900
18,400
ital
Print
Done
Clear all
Print

Data table
(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
Percentage by recovery year*
Recovery year
3 years
5 years
1
7 years
10 years
33%
20%
14%
10%
45%
32%
25%
18%
3
15%
19%
18%
14%
4
7%
12%
12%
12%
12%
9%
9%
5%
9%
8%
7
9%
7%
8
4%
6%
9.
6%
10
6%
11
4%
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
conuontion
A 69°F
C

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