Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The gr

Question

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

What are the operating cash flows in years 1 to 3?

What are total cash flows in years 1 to 3?

a.

What are the operating cash flows in years 1 to 3?

b.

What are total cash flows in years 1 to 3?

c. If the discount rate is 10%, should the grill be purchased?

Explanation / Answer

yes grill should be purchased as NPV is +ve

Marginal tax rate 30% Time line 0 1 2 3 Cost of equipment -48000 +NWC 0 =Initial Investment outlay -48000 Savings 24000 24000 24000 MACR rate 33.33% 44% 14.81% 7.41% -Depreciation =Cost of equipment * MACR %age 15998.4 21336 7108.8 3556.8 =salvage BV =Pre tax operating Cash flow 8001.6 2664 16891.2 -taxes =Pre tax operating CF*(1-tax) 5601.12 1864.8 11823.84 +Depreciation 15998.4 21336 7108.8 =after tax operating cash flow 21599.52 23200.8 18932.64 Terminal cash flow Reversal of NWC 0 After taxCash inflow due to sale =selling price* (1 - tax rate) 8400 +salvage value*tax rate 1067.04 Terminal year after tax non operating cash flow = Total Cash flow for the period -48000 21599.52 23200.8 28399.68 Discount rate= 10% Discount factor =(1 + discount rate)^n 1 1.1 1.21 1.331 Discounted Cash flow =Cash flow for period/discount factor -48000 19635.93 19174.21 21337.1 NPV =Sum of discounted cash flow 12147.24

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