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 $60,000. Installation costs at the time for the machine were $8,000. The existing equipment is considered a 5-year class for MACRS. The existing equipment can be sold today for $50,000 and for $30,000 in 3 years. The new equipment has a purchase price of $130,000 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 is $70,000. This new equipment is more efficient than the existing one and thus savings before taxes using the new equipment are $10,000 a year. Due to these savings, inventories will see a one time reduction of $3,000 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 1? MACRS Fixed Annual Expense Percentages by Recovery Class Year 1 2 3-Year 33.33% 44.45% 14.81% 7.41% 3 5-Year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 4 7-Year 14.29% 24.49% 17.49% 12.49% 8.93% 8.93% 8.93% 4.45% 5 10-Year 10.00% 18.00% 14.40% 11.52% 9.22% 7.37% 6.55% 6.55% 6.56% 6.55% 3.28% 6 7 8 15-Year 5.00% 9.50% 8.55% 7.70% 6.93% 6.23% 5.90% 5.90% 5.91% 5.90% 5.91% 5.90% 5.91% 5.90% 5.91% 2.95% 9 10 11 12 13 14 15 16