Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The gr
ID: 2776243 • Letter: J
Question
Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $7,750. The grill will have no effect on revenues but will save Johnny’s $15,500 in energy expenses. The tax rate is 40%. Use the MACRS depreciation schedule.
a.) What are the operating cash flows in each year? (Year 1, 2, and 3)
b.) What are the total cash flows in each year? (Time 0, 1, 2, and 3)
Explanation / Answer
Cost of Grill $31000 MACRS Rates 1st Year 33.33% 2nd Year 44.45% 3rd Year 14.81% Scrap Value $7750 Savings on Energy Expenses $ 15500 Tax Rate 40% a. Calculation of Operating Cash Flows Year 1 Year 2 Year 3 Savings on energy expenses $15,500.00 $15,500.00 $15,500.00 Depreciation $10,332.30 $13,779.50 $4,591.10 Savings less of depreciation $5,167.70 $1,720.50 $10,908.90 Tax payable on Savings $2,067.08 $688.20 $4,363.56 Net Savings $3,100.62 $1,032.30 $6,545.34 Operating Cash Flow $13,432.92 $14,811.80 $11,136.44 (Net Savings + Depreciation) b.Calculation of Total Cash Flows Year 0 Year 1 Year 2 Year 3 Cost of Grill -$31,000.00 Operating Cash Flow $13,432.92 $14,811.80 $11,136.44 Scrap Value $7,750.00 Total Cash Flows -$31,000.00 $13,432.92 $14,811.80 $18,886.44
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