Computation of the incremental free cash flow

Reference no: EM1313638

Computation of the incremental free cash flow for the first year of the new project

You are analyzing the purchase of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you $2,500 and recommended the purchase of the latest model from Equipment Corp. of America. The equipment costs $60,000, and it will cost another $12,000 to modify it for special use by your firm. The equipment will be depreciated on a straight-line basis over six years with no salvage value. You expect the equipment will be sold after three years for $18,000. Use of the equipment will require an increase in your company's net working capital of $3,000, but this $3,000 will be recovered at the end of year three. The use of the equipment will have no effect on revenues, but it is expected to save the firm $30,000 per year in before-tax operating costs.

Your company's marginal tax rate is 40%. What is the incremental free cash flow for the first year of the project?

a. $22,800

b. $24,750

c. $28,400

d. $30,880

Reference no: EM1313638

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