Your company is considering the replacement of an old delivery van with a new on

Question

Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The van is being depreciated using the simplified straight line method over a useful life of 10 years . The old van could be sold today for $5000 . The new van has an invoice of $75000 and it will cost $5000 to modify the van to carry the companies products. Cost savings from use of new van is expected to be $22000 per year for 5 years at which time the van will be sold for it's estimated salvage value of $15000. The new van will be depreciated using the simplified straight line method over it's 5 year useful life. The company's tax rate is 35% . Working capital is expected to increase by $3000 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. $22,250
B. $18,850
C. $21,305
D. $19,900

Explanation / Answer

A

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