What is the incremental cash flow in year one

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Big-Pear Corp. is considering replacing its existing equipment that is used to produce smart cell phones. This existing equipment was purchase 3 years ago at a base price of $40. Installation costs at the time for the machine were $8. The existing equipment is considered a 5-year class for MACRS. The existing equipment can be sold today for $40 and for $20 in 3 years. The new equipment has a purchase price of $140 and is also considered a 5-year class for MACRS. Installation costs for the new equipment are $8. The estimated salvage value of the new equipment is $90. This new equipment is more efficient than the existing one and thus savings before taxes using the new equipment are $16 a year. Due to these savings, inventories will see a one time reduction of $1 at the time of replacement.

Problem 1: The company's marginal tax rate is 20% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 1?

Reference no: EM132856703

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