Tim’s Brazilian Lunches is considering purchasing a new, energy-efficient grill.

Question

Tim’s Brazilian Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $20,000 and will be depreciated in an asset class that carries a CCA rate of 30%. It will be sold for scrap metal after 3 years for $7,500. The grill will have no effect on revenues but will save Tim’s $9,000 in energy expenses. The firm has other assets in this asset class. The tax rate is 35%.

a. What are the operating cash flows in years 1 to 3, not including any CCA calculation?

b. What is the present value of the tax shield if the discount rate is 12%?

c. If the discount rate is 12%, should the grill be purchased?

Explanation / Answer

a) operating cash flow without any CCA calculation is as under

b) First of all we need to find depreciation

Statement showing depreciation

Statement showing PV of Tax shield

C) Statement showing NPV

Sunce NPV is positive, Grill should be purchased

Particulars 1 2 3 Annual savings in energy expense 9000 9000 9000 Tax @ 35% 3150 3150 3150 Annual cash flow without CCA calculation 5850 5850 5850

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