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 rate is 12%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

Expert Solution

Year	Purchase cost	OCF= Savings+ tax shield on depreciation	Salvage after tax	Total cash flow
0	-49000			-49000
1		22050		22050
2		22050		22050
3		22050		22050
4		17150		17150
5		17150	8575	25725

NPV=

29456.57

Yes, since NPV is positive.

Workings

jeff jeffy answered 2 days ago

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