Johnny%u2019s Lunches is considering purchasing a new, energy-efficient grill. T
ID: 2699620 • Letter: J
Question
Johnny%u2019s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $45,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,250. The grill will have no effect on revenues but will save Johnny%u2019s $22,500 per year in energy expenses. The tax rate is 30%. Use MACRS depreciation schedule.
What are the operating cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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.)
Johnny%u2019s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $45,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,250. The grill will have no effect on revenues but will save Johnny%u2019s $22,500 per year in energy expenses. The tax rate is 30%. Use MACRS depreciation schedule.
Explanation / Answer
Definition of 'Operating Cash Flow - OCF' In accounting, a measure of the amount of cash generated by a company's normal business operations. Operating cash flow is important because it indicates whether a company is able to generate sufficient positive cash flow to maintain and grow its operations, or whether it may require external financing. OCF is calculated by adjusting net income for items such as depreciation, changes to accounts receivable and changes in inventory. ............................................................................................................................................................................. Financial analysts sometimes prefer to look at cash flow metrics because it strips away certain accounting effects and is thought to provide a clearer picture of the current reality of the business operations. For example, booking a large sale provides a big boost to revenue, but if the company is having a hard time collecting the cash, then it is not a true economic benefit to the company. On the other hand, a company may be highly profitable on a cash flow basis, but may not have a low net income if it has a lot of fixed assets and uses accelerated depreciation calculations.
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