Big-Pear Corp. is considering replacing its existing equipment that is used to produce

smart cell phones. This existing equipment was purchase 2 years ago at a base price

of $50,000. Installation costs at the time for the machine were $6,000. The existing

equipment is considered a 5-year class for MACRS. The existing equipment can be

sold today for $40,000 and for $20,000 in 4 years. The new equipment has a

purchase price of $110,000 and is also considered a 5-year class for MACRS.

Installation costs for the new equipment are $6,000. The estimated salvage value of

the new equipment in year 4 is $90,000. This new equipment is more efficient than

the existing one and thus savings before taxes using the new equipment are $20,000

a year. Due to these savings, inventories will see a one time reduction of $2,000 at

the time of replacement. The company's marginal tax rate is 40% and the cost of

capital is 12%. For this project, what is the incremental cash flow in year 3?

MACRS Fixed Annual Expense Percentages by Recovery Class 3-Year 5-Year 7-Year 10-Year 15-Year 33.33% 20.00% 14.29% 10.00% 5.00% 44.45% 32.00% 24.49% 18.00% 9.50% 14.81% 19.20% 17.49% 14.40% 8.55% 7.41% 11.52% 12.49% 11.52% 7.70% 11.52% 8.93% 9.22% 6.93% 5.76% 8.93% 7.37% 6.23% 8.93% 6.55% 5.90% 4.45% 6.55% 5.90% 6.56% 5.91% 6.55% 5.90% 3.28% 5.91% Year 1 2 3456ragHNS6 10 11 12 13 14 15 16 For your ow 5.90% 5.91% 5.90% 5.91% 2.95%