Question

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $48,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $12,000. The grill will have no effect on revenues but will save Johnny’s $24,000 in energy expenses. The tax rate is 30%.

Required:

a. What are the operating cash flows in each year?
b. What are the total cash flows in each year?
c. Assuming the discount rate is 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

• Required A

What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Year Operating Cash Flows 1 2 3

Required B

What are the total cash flows in each year? (Negative amounts should be indicated with a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Time Total Cash Flows 0 1 2 3

Required C

Assuming the discount rate is 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

	NPV of cash flow stream Should the grill be purchased?

Answer 1

Year Increases Operating income as Savings in Expenses Tax Payable @30% on A Operating Cash Flows A-B 24000 24000 24000 7200 7200 7200 16800 16800 16800 Tax Savings @30% on Year Operating Cash Flows As Per Above answer Depreciation(notel) Cash Outflow Prently Cash Flows C=B*30% A+B+D 3600 3600 3600 0 0 0 - 48000 20400 20400 20400 16800 12000 16800 12000 16800 12000 Note:Depreciation Depreciation= Cost-Salvage Value Life = 48000-12000 12000

Net Present Value Year Cash inflow Present Annuity factor@10% Present Value A*B -48000 20400 20400 20400 Net Present Value 1.000 0.909 0.826 0.751 -48000.00 18545.45 16859.50 15326.82 2732 Decision: As Net Present Value is positive thus Purchasing machine is Advisable.