QRW Corp. needs to replace an old lathe with a new, more efficient model. The ol

Question

QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. QRW's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the incremental free cash flow during year 1 of the project? Select one: a. $11,400 X b. $12,800 c. $15,200 d. $14,400

Explanation / Answer

In year 1 after initial CapEx has already been done

Incremental Cash Flow = (8000 + 12000)*(1-.4)+(11000-5000)*(0.4)

20000*0.6+6000*0.4 = 12000+2400 = 14400

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