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?

$1,250,000

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

1. Determine the cash outflows:
- Cost of the new van: $75,000
- Modification cost: $5,000
- Increase in working capital: $3,000

Total cash outflows: $75,000 + $5,000 + $3,000 = $83,000

2. Determine the cash inflows:
- Cost savings from the use of the new van: $22,000

Total cash inflows: $22,000

3. Calculate the incremental free cash flow for year one:
Incremental Free Cash Flow = Cash Inflows - Cash Outflows
Incremental Free Cash Flow for year one = $22,000 - $83,000

Note: In this case, since the cost outflows exceed the cash inflows, the incremental free cash flow for year one would be negative.

Therefore, the incremental free cash flow for year one is -$61,000.