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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 rate is 12%, calculate the net present value (NPV) of the cash flow stream.

Should the grill be purchased?

Answer for:

A. What are the 3-Year Operating Cash Flows?

Year 1

Year 2

Year 3

B. What are the total cash flows in each year? (Negative amounts should be indicated with a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Total Cash Flows

Year 0 $(32,000.00)

Year 1

Year 2

Year 3

C. Assuming the discount rate is 12%, calculate the net present value (NPV) of the cash flow stream.

Should the grill be purchased? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What is the NPV of cash flow stream?

Should the grill be purchased?

Expert Solution

a.

Year 1	14400
Year 2	14400
Year 3	14400

b.

Year 0	-32000
Year 1	14400
Year 2	14400
Year 3	14400

c.

NPV of cash flow stream = $19236.94

Should the grill be purchased = Yes

Workings:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial investment	-32000
Cash savings		16000	16000	16000	16000	16000
Less: Tax rate (30%)		4800	4800	4800	4800	4800
Add: Depreciation tax savings		3200	3200	3200
Operating cash flows		14400	14400	14400	11200	11200
After tax cash flows from sale						5600
Total cash flows	-32000	14400	14400	14400	11200	16800
Discount factor @12%	1	0.892857143	0.7971939	0.711780248	0.635518078	0.56743
Discounted cash flows	-32000	12857.14286	11479.592	10249.63557	7117.802478	9532.77
NPV						19236.94

Depreciation for 3 years = 32000/3 = 10666.67

Depreciation tax savings = 10666.67*30% = 3200

After tax cash flows from sale = 8000* (1-30%) =$5600

jeff jeffy answered 1 year ago

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