Johnnys Lunches is considering purchasing a new, energy-efficient grill. The gri

Question

Johnnys Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $47,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750. The grill will have no effect on revenues but will save Johnnys $23,500 per year in energy expenses. The tax rate is 40%. Use MACRS depreciation schedule. a. What are the operating cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Operating Cash Flows for year #1_________, year #2__________ and year #3_________ b. What are total cash flows in years 1 to 3? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Time is year 0 total cash flows is $_________, year 1 total cash flows__________, year 2 is $______ & year 3 is $________

Explanation / Answer

we compute the impact on operating cash flows by summing the value of the depreciation tax shield (depreciation tax rate) plus the net-of-tax improvement in operating income [$24,000 (1 tax rate)]. Although the MACRS depreciation schedule extends out to 4 years, the project will be terminated when the machine is sold after 3 years, so we need to examine cash flows for only 3 years. Operating Contribution to Depreciation Income Operating Cash MACRS Depreciation 0.30 (1 0.30) Flow 0.3333 $15,998.40 $4,799.52 $16,800 $21,599.52 0.4445 21,336.00 6,400.80 16,800 23,200.80 0.1481 7,108.80 2,132.64 16,800 18,932.64 0.074 1 b.Total cash flow = operating cash flow + cash flow associated with investments At time 0, the cash flow from the investment is $48,000. When the grill is sold at the end of year 3, its book value will be $3,556.80, so the sales price, net of tax, will be $12,000 [0.30 ($12,000 $3,556.80)] = $9,467.04. Year 3: Total cash flows = $28,399.68 = [$18,932.64 + $9,467.04]

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.