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 $49,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $12,250. The grill will have no effect on revenues but will save Johnny’s $24,500 per year in energy expenses. The tax rate is 30%. Use MACRS depreciation schedule.

a. What are the operating cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Year Operating Cash Flows 1.$_____, 2.______, 3._______

b. 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.)

Time 0 Total Cash Flows _______?

Time 1 Total Cash Flows _______?

Time 2 Total Cash Flows _______?

Time 3 Total Cash Flows _______?

c. If the discount rate is 12%, should the grill be purchased? YES or NO

Explanation / Answer

When expenses saved is taken as cash flows

a)Year operating cashflows 1.)-$49000 2) nil 3)$12250

b)

If the discount rate is 12%, should the grill be purchased? YES or NO

The answer is yes as NPV is positive.

year Cash flow Tax Net income Tax savings on dep CFAT 0 -49000 -49000 1 24500 9800 14700 4900 19600 2 24500 9800 14700 4900 19600 3 24500 9800 14700 4900 19600 3 12250 12250

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