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

Question

Your company is considering a 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 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.1) What is the initial outlay required to fund this replacement project ? choices: A)73,580, B)78,600, c)81,200, D)74,500. 2)what is the incremental free cash flow for year one? A)22,305 B)18,875 C)24,220 D)19,985 Please provide explanation for your answers...guesses are not helpful.. thank you:0)

Explanation / Answer

1)the initial outlay required to fund this replacement project ?

c)81,200

initial outlay =machine Cost + Modifying new Machine Cost + Incremental Working Capital - Post Salvage Value of Old Machine

= 80,000+6000+5000 - (7000 +(40,000/8*3 -7000)*35%)

=81,200

2)what is the incremental free cash flow for year one?

C)24,220

incremental free cash flow

=28000(1-0.35) + 86000/5*0.35

=24,220

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