Your company is considering a replacement of an old delivery van with a new one that is more efficient. 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 company’s 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 simplified straight line method over its 5 year useful life. The company’s statutory 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 five. What is the incremental free cash flow for year one?

To calculate the incremental free cash flow for year one, we need to consider all the relevant cash flows associated with the replacement of the old delivery van with the new one.

First, let's calculate the depreciation expense for the old van. The cost of the old van was $30,000, and it is being depreciated over a useful life of 10 years using the simplified straight-line method. Therefore, the annual depreciation expense for the old van is $30,000 / 10 = $3,000.

Next, let's determine the cash flow from the sale of the old van. The old van can be sold today for $5,000, so this is a cash inflow.

Now, let's consider the cash flows related to the new van. The invoice price of the new van is $75,000, and it will cost an additional $5,000 to modify the van. Therefore, the total cost of the new van is $75,000 + $5,000 = $80,000.

The cost savings from using the new van are expected to be $22,000 per year for 5 years. So, the total cash savings over the 5-year period would be $22,000 * 5 = $110,000.

Additionally, at the end of the 5-year period, the new van is estimated to be sold for $15,000, which is the salvage value.

Taking into account the company's statutory tax rate of 35%, the incremental free cash flow for year one can be calculated as follows:

Incremental free cash flow = Cash inflows - Cash outflows - Tax expense

Cash inflows:
- Sale of old van: $5,000

Cash outflows:
- Cost of new van: $80,000
- Tax expense on the cost savings: $22,000 * 35% = $7,700

Tax expense on the sale of the old van:
- Gain on the sale of old van = Sale price - Book value = $5,000 - $3,000 = $2,000
- Tax expense on gain = Gain * Tax rate = $2,000 * 35% = $700

Therefore, the tax expense on the cash inflow from the sale of the old van is $700.

Incremental free cash flow for year one = $5,000 - $80,000 - $7,700 - $700 = -$83,400

The incremental free cash flow for year one is -$83,400.