Question

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $7,750. The grill will have no effect on revenues but will save Johnny’s $15,500 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 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

Answer 1

	Initial cost		=	Cost fo grill =$31,000
	Depreciation		=	Cost fo grill/3 years
			=	$31,000/3
			=	$ 10,333.33
	terminal cashflow		=	Aftertax salvage value
			=	$7750*(1-taxrate)
			=	$7750*(1-0.3)
			=	$7750*0.7
			=	$    5,425.00
a)	calculation ofoperating cashflow
	Year	1	2	3	4	5
1)	Saving in cost	$15,500	$15,500	$15,500	$15,500	$15,500
2)	Depreciation	$10,333.33	$10,333.33	$10,333.33
3)=1-2	Profit	$5,166.67	$5,166.67	$5,166.67	$15,500.00	$15,500.00
4)=3*30%	tax	$1,550.00	$1,550.00	$1,550.00	$4,650.00	$4,650.00
5)=3-4	Net profit	$3,616.67	$3,616.67	$3,616.67	$10,850.00	$10,850.00
6)=5+2	Operating cashflow	$13,950.00	$13,950.00	$13,950.00	$10,850.00	$10,850.00
b)	Calculation of total cashflow each year
	Year	1	2	3	4	5
1)	Operating cashflow	$13,950.00	$13,950.00	$13,950.00	$10,850.00	$10,850.00
2)	terminal value					$5,425
3)=1+2	Total cashflow	$13,950.00	$13,950.00	$13,950.00	$10,850.00	$16,275.00
c)	Calculation of NPV
	Year	1	2	3	4	5	total
1)	Total cashflow	13949.999	13949.999	13949.999	10850	16275
2)	PVF@11%	0.9009	0.8116	0.7312	0.6587	0.5935
3)=1*2	Present value	12567.5667	11322.13213	10200.119	7147.231069	9658.42036	$ 50,895.47
	NPV	=	Sum of cashinflow-initialoutflow
		=	$50,895.47-$31,000
		=	19895.47
	Since NPV is positive,jhonny's lunches should purchase the grill
	If you have any doubt,pleasea sk
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