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Johnny's Lunches is considering purchasing a new energy efficient grill. the grill will cost $38,000 and...

Johnny's Lunches is considering purchasing a new energy efficient grill. the grill will cost $38,000 and will be depreciated straight-line ober 3 years. It will be sold for scrap metal after 5 years for $9,500. The grill will have no effect on revenues but will save Johnny's $19,000 in energy expenses. The tax rate is 30%.

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

a)

(OCF = operating cash flow)

b)

after tax salvage value = 9500*(1 - tax rate)

= 9500*(1 - 0.3)

= 6650

c)

NPV = present value of future cash flows - initial cash outflow

= 60483.87 - 38000

= $22843.87

since NPV is positive grill can be purchased

jeff jeffy answered 1 year ago

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