Top-Ten Inc. is considering replacing its existing machine that is used to produce musical CDs. This existing machine was purchase 3 years ago at a base price of $60,000. Installation costs at the time for the machine were $2,000. The existing machine is considered a 3-year class for MACRS. The existing machine can be sold today for $30,000 and for $20,000 in 3 years. The new machine has a purchase price of $90,000 and is also considered a 3-year class for MACRS. Installation costs for the new machine are $7,000. The estimated salvage value of the new machine is $20,000. This new machine is more efficient than the existing one and thus savings before taxes using the new machine are $8,000 a year. The company's marginal tax rate is 30% and the cost of capital is 12%. For this project, what is the incremental cash flow in year 1?

MACRS Fixed Annual Expense Percentages by Recovery Class

Year 3-Year 5-Year 7-Year 10-Year 15-Year

1 33.33% 20.00% 14.29% 10.00% 5.00%

2 44.45% 32.00% 24.49% 18.00% 9.50%

3 14.81% 19.20% 17.49% 14.40% 8.55%

4 7.41% 11.52% 12.49% 11.52% 7.70%

5 11.52% 8.93% 9.22% 6.93%

6 5.76% 8.93% 7.37% 6.23%

7 8.93% 6.55% 5.90%

8 4.45% 6.55% 5.90%

9 6.56% 5.91%

10 6.55% 5.90%

11 3.28% 5.91%

12 5.90%

13 5.91%

14 5.90%

15 5.91%

16 2.95%