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 ef?cient. The old van cost $30,000 when it was purchased 5 years ago. The old
van is being depreciated using the simpli- ?ed straight-line method over a useful life of 10 years.
The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it
will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the
new van are expected to be $22,000 per year for
5 years, at which time the van will be sold for its estimated salvage value
of $15,000. The new van will be depreciated using the simpli?ed straight- line method over its
5-year useful life. The company’s tax rate is 35%. Work- ing capital is expected to increase by
$3,000 at the inception of the project, but this amount will be recaptured at the end of year ?ve.

What is the incremental free cash ?ow for year one?
a. $22,250
b. $18,850
c. $21,305
d. $19,900

Explanation / Answer

b. $18,850

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