Question

ohnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $30,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $7,500. The grill will have no effect on revenues but will save Johnny’s $15,000 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 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

Answer 1

Question a:

Operating Cash flows in each year

Year 1: $13,500

Year 2: $13,500

Year 3: $13,500

Year 4: $10,500

Year 5: $10,500

Question b:

Total Cash flows in each year

Year 0: -$30,000

Year 1: $13,500

Year 2: $13,500

Year 3: $13,500

Year 4: $10,500

Year 5: $15,750

Question c:

NPV of the Cash Flow Stream is $20,523.65

Yes, Grill can be purchased since NPV of the Cash flow stream is posititve