Question

Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $18,700 and will be depreciated in an asset class that carries a CCA rate of 30%. It will be sold for scrap metal after 3 years for $4,800. The grill will have no effect on revenues but will save Johnny's $12,000 in energy expenses. The firm has other assets in this asset class. The tax rate is 35%.

        

a.	What are the operating cash flows in years 1 to 3? (Round your answers to the nearest cent.)
	The operating cash flow in year 1?
	The operating cash flow in year 2?
	The operating cash flow in year 3?

   

b.	What are total cash flows in years 1 to 3? (Round your answers to the nearest cent.)
	The total cash flow in year 1?
	The total cash flow in year 2?
	The total cash flow in year 3?

c.	If the discount rate is 14%, should the grill be purchased?
	If the discount rate is 14%, the grill

Answer 1

Tax rate		35%
	Year-0	Year-1	Year-2	Year-3
Saving in Cost		12,000	12,000	12,000
Less: Depreciation as per table given below		5,610	3,927	2,749
Profit before tax		6,390	8,073	9,251
Tax		2,237	2,826	3,238
Profit After Tax		4,154	5,247	6,013
Add Depreciation		5,610	3,927	2,749
Cash Profit After tax		9,764	9,174	8,762
Cost of macine			18,700
Depreciation			12,286
WDV			6,414
Sale price			4,800
Profit/(Loss)			(1,614)
Tax			(565)
Sale price after tax			5,365
Depreciation		Year-1	Year-2	Year-3			Total
Cost		18,700	13,090	9,163
Dep Rate		30.00%	30.00%	30.00%
Deprecaition		5,610	3,927	2,749			12,286
Calculation of NPV
						14.00%
Year		Captial		Operating cash	Annual Cash flow	PV factor	Present values
0		(18,700)			(18,700)	1.000	(18,700)
1				9,764	9,764	0.877	8,564
2				9,174	9,174	0.769	7,059
3		5,365		8,762	14,127	0.675	9,535
					Net Present Value		6,459
Since NPV is positivie, machine should be accepted