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 $44,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,000. The grill will have no effect on revenues but will save Johnny’s $22,000 in energy expenses per year. The tax rate is 40%. Use the MACRS depreciation schedule.

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

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

c. If the discount rate is 11%, should the grill be purchased?

Yes

No

Explanation / Answer

Ans) Year 0 1 2 3 Initial Investment $                    (44,000.00) Save Expenses $              22,000.00 $ 22,000.00 $    22,000.00 Depreciation $              14,665.20 $ 19,558.00 $      6,516.40 EBIT $                7,334.80 $    2,442.00 $    15,483.60 Tax @40% $                2,933.92 $        976.80 $      6,193.44 a) Operating Cash Flow $                4,400.88 $    1,465.20 $      9,290.16 Add: Depreciation $              14,665.20 $ 19,558.00 $      6,516.40 After tax salvage value $      7,904.16 b) After Tax Cash flow or total cash flow $                    (44,000.00) $              19,066.08 $ 21,023.20 $    23,710.72 P.V.Factor @11% $                                 1.00 $                      0.901 $          0.812 $            0.731 After tax P.V $                    (44,000.00) $              17,178.54 $ 17,070.84 $    17,332.54 c ) NPV=(-$44000+$17178.54+$17070.84+$17332.54) $                        7,581.91 NPV is positve so Grill should b purchased MACRS Depreciation Rate (Property class of three years) Years Depreciation Rate Depreciation Year 1 33.33% ($44000*33.33%)= $ 14,665.20 Year 2 44.45% ($44000*44.45%)= $ 19,558.00 Year 3 14.81% ($44000*14.81%) $    6,516.40 Year 4 7.41% Book Value=($44000-$14665.20-$19558-$6516.40) $                        3,260.40 After Tax Salvage Value=Cash Proceeds on sale-(Cash Proceds on sale-Book Value)*Tax rate (Cash Proceeds on Sales -Book Value)*Tax Rate=($11000-$3260.40)*40%) 3095.84 After Tax Salvage Value=($11000-$3095.84) $                        7,904.16

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