Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The gr
ID: 2745541 • Letter: J
Question
Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $38,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $9,500. The grill will have no effect on revenues but will save Johnny’s $19,000 in energy expenses per year. 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 No
Explanation / Answer
Depreciation Calculation:-
Year MACR Rate Depreciation
1 33.3 % 38000 * 33.3%= $12654
2 44.45% 38000 * 44.45% = $ 16891
3 14.81% * (38000-9500)/3= 9500 (Swith over to SLM because it will provide high depreciation)
Tax Saving on Depreciation
.30 * $ 12654= $ 3796
.30 * $ 16891= $ 5067
.30 * $9500 = $ 2850
$ 11713
Calculation of Operating Cash Flows:-
Year /Income 1 2 3
Saving in Energy Expenses 19000 19000 19000
less :Tax @ 30% 5700 5700 5700
Operating Cash Flow 13300 13300 13300
Note: Depreciation is a Non-Operating Item
Year /Income 1 2 3
Saving in Energy Expenses 19000 19000 19000
Less:Dep 12654 16891 9500
Income 6346 2109 9500
Tax @ 30% 1903 633 2850
Profit after Tax 4443 1476 6650
Add: Deprecition 12654 16891 9500
Cash Flow 17097 18367 16150
Year Cash Flow PVF @ 12% PRESENT VALUE
1 17097 0.893 15268
2 18367 0.797 14639
3 16150 0.712 11499
TOTAL 41406
3 9500(SCRAP) 0.712 6764
NET PRESENT VALUE OF CASH INFLOW 48170
LESS:PRESENT VALUE OF CASH OUTFLOW 38000
NET PRESENT VALUE 10170
SINCE THE NPV IS POSITIVE THE GRILL MAY BE PURCHASED.
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