Reference no: EM133029459

Question - 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 $40. Installation costs at the time for the machine were $7. The existing equipment is considered a 5-year class for MACRS. The existing equipment can be sold today for $50 and for $20 in 3 years. The new equipment has a purchase price of $140 and is also considered a 5-year class for MACRS. Installation costs for the new equipment are $8. The estimated salvage value of the new equipment is $70. This new equipment is more efficient than the existing one and thus savings before taxes using the new equipment are $20 a year. Due to these savings, inventories will see a one time reduction of $3 at the time of replacement. The company's marginal tax rate is 20% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 1?

5 YEAR MACRS

Year 1 = 20%

Year 2 = 32%

Year 3 = 19.20%

Year 4 = 11.52%

Year 5 = 11.52%

Year 6 = 5.76%