Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The gr
ID: 2715974 • Letter: J
Question
Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $43,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $10,750. The grill will have no effect on revenues but will save Johnny’s $21,500 in energy expenses. The tax rate is 30%. 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.)
Year Operating Cash Flows
1 $
2 $
3 $
b. What are the total cash flows in each year? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Time Total Cash Flows
0 $
1 $
2 $
3 $
c.
If the discount rate is 12%, should the grill be purchased? Yes or No
Explanation / Answer
Answer:
a)
b) Initial cashflow = Cost of the gril = $43,000
Terminal cashflow =
The Total Cashflow & NPV will be:
As the NPV is positive the gril should be purchased.
A B C = A-B D E = C-D F = E+B Year Save in cost MACRS depn rate Depreciation on $43,000 at MACRS rate Profit Tax @ 30% PAT Operating Cashflows 1 21500 33.33% 14331.9 7168.1 2150.43 5017.67 19349.57 2 21500 44.45% 19113.5 2386.5 715.95 1670.55 20784.05 3 21500 14.81% 6368.3 15131.7 4539.51 10592.19 16960.49Related Questions
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