After spending $10,000 on client development, you have just been offered a big production contract by a new client. The contract will add $200,000 to your revenues for each of the next 3 years and it will cost you $100,000 per year to make the additional product. You will have to use some existing equipment and buy new equipment as well. The existing equipment is fully depreciated but could be sold for $50,000. If you use it in the project, you think you will still be able to sell it for $10,000 at the end. You will buy new equipment valued at $30,000 and straight-line depreciate it to zero over 3 years. It will be worthless at the end of the project. You will have to immediately increase your inventory from $20,000 to $30,000. It will return to $20,000 at the end of the project. Your companys tax rate is 35% and your discount rate is 15%. First, answer the questions below to determine the incremental cash flows. What is the incremental cash flow in year 3?

• A. $85,000
• B. $75,000
• C. $42,500
• D. $65,000