Question

In: Finance

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $40,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $40,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $10,000. The grill will have no effect on revenues but will save Johnny’s $20,000 in energy expenses. The tax rate is 30%.

Required:

a. What are the operating cash flows in each year?
b. What are the total cash flows in each year?
c. Assuming the discount rate is 12%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

Expert Solution

Question a:

Operating Cash Flow in Year 1 is $18,000

Operating Cash Flow in Year 2 is $18,000

Operating Cash Flow in Year 3 is $18,000

Operating Cash Flow in Year 4 is $14,000

Operating Cash Flow in Year 5 is $14,000

Question b:

Total Cash Flow in Year 0 is -$40,000

Total Cash Flow in Year 1 is $18,000

Total Cash Flow in Year 2 is $18,000

Total Cash Flow in Year 3 is $18,000

Total Cash Flow in Year 4 is $14,000

Total Cash Flow in Year 5 is $21,000

Question c:

NPV of the cash flow stream is $24,046.18

Yes, Grill should be purchased since NPV > 0

jeff jeffy answered 2 years ago

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $33,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $33,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $8,250. The grill will have no effect on revenues but will save Johnny’s $16,500 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $43,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $43,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 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%. Required: a. What are the operating cash flows in each year? Year 1: Year 2: Year 3: b. What are the total cash flows in...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $50,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $50,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $12,500. The grill will have no effect on revenues but will save Johnny’s $25,000 in energy expenses per year. The tax rate is 40%. Use the MACRS depreciation schedule. a. What are the operating cash flows in each year? (Do not round intermediate calculations. Round...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $32,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $32,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $8,000. The grill will have no effect on revenues but will save Johnny’s $16,000 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $39,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $39,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $9,750. The grill will have no effect on revenues but will save Johnny’s $19,500 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 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 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $48,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $48,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $12,000. The grill will have no effect on revenues but will save Johnny’s $24,000 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $37,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $37,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $9,250. The grill will have no effect on revenues but will save Johnny’s $18,500 in energy expenses per year. The tax rate is 40%. Use the MACRS depreciation schedule. a. What are the operating cash flows in each year? (Do not round intermediate calculations. Round...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $49,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $49,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $12,250. The grill will have no effect on revenues but will save Johnny’s $24,500 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $46,000 and will...

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $46,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $11,500. The grill will have no effect on revenues but will save Johnny’s $23,000 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount...