Your company is considering the replacement of an old delivery van with a new one that is more effi cient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the companys products. Cost savings from use of the new van are expected to be $22,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplifi ed straightline method over its 5-year useful life. The companys tax rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year fi ve. What is the incremental free cash fl ow for year one?

a. $22,250 b. $18,850 c. $21,305 d. $19,900

A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the fi rm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to fi nance the acquisition. Total interest expense for 5-years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes?

a. $2,030,000 b. $1,530,000 c. $1,100,000 d. $1,250,000 e. $1,280,000

PDF Corp. needs to replace an old lathe with a new, more effi cient 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 straightline 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. PDFs 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 projects ten-year life. What is the projects terminal cash flow?

a. $8,000 b. $6,000 c. $5,000 d. $3,000