Johns lunches is considering purchasing a new energy efficient grill. The grill
ID: 2714601 • Letter: J
Question
Johns lunches is considering purchasing a new energy efficient grill. The grill will cost 30,000 and will be depreciated according to the 3 year macrs schedule. It will be sold for scrap metal after 3 years for 7500. The grill will have no effect on revenues but will save johnnys 15000 in energy expenses. The tax rate is 30%.What are the operating cash flows in each year?
What are the total cash flows each year?
If the discount rate is 10% should the grill be purchased?
Johns lunches is considering purchasing a new energy efficient grill. The grill will cost 30,000 and will be depreciated according to the 3 year macrs schedule. It will be sold for scrap metal after 3 years for 7500. The grill will have no effect on revenues but will save johnnys 15000 in energy expenses. The tax rate is 30%.
What are the operating cash flows in each year?
What are the total cash flows each year?
If the discount rate is 10% should the grill be purchased?
What are the operating cash flows in each year?
What are the total cash flows each year?
If the discount rate is 10% should the grill be purchased?
What are the operating cash flows in each year?
What are the total cash flows each year?
If the discount rate is 10% should the grill be purchased?
Explanation / Answer
Opearting Cash Flow= Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. Year 1 Year 2 Year 3 Depreciation MACRS 33.33% 44.45% 14.81% Investment (30,000) Increase in revenue(decrease in energy expense) 15,000 15,000 15,000 Salvage value 7,500 Depreciation (9,999.00) (13,335.00) (4,443.00) Taxable income 5,001 1,665 18,057 Tax @30% 1,500.30 499.50 5,417.10 Opearing CasH Flow = Earning before depreciation less tax 13,499.70 14,500.50 9,582.90 Post Tax Income 3,500.70 1,165.50 12,639.90 Add back depreciation 9,999.00 13,335.00 4,443.00 Total Cash Flow (30,000) 13,499.70 14,500.50 17,082.90 Discount factor @10% 1 0.909 0.826 0.751 PV of cash flows (30,000.00) 12,272.45 11,983.88 12,834.64 NPV 7,090.97 As the NPV is positive , the grill may be purchased,
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