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.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. The company's tax rate is 35%. The company

Explanation / Answer

1) What is the incremental free cash flow for year one?

$18,850

2) What is the terminal cash flow?

$12,750

3) What is the tax effect of selling the old machine?

a savings of $3,500

4) What is the initial outlay required to fund this replacement project?

$74,500

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