Your company is considering the replacement of an old delivery van with a new one that is more
efficient. The old van cost $40,000 when it was purchased 5 years ago.
The old van is being
depreciated using the simplified straight-line method over a useful life of 8 years. The old van
could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000
to modify the van to carry the company's products. Cost savings from use of the new van are
expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated
salvage value of $18,000. The new van will be depreciated using the simplified straight-line
method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to
increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of
year five. What is the incremental free cash flow for year one?
A) $24,220 B) $22,305 C) $18,875 D) $19,985
A
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