Question

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $33,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $8,250. The grill will have no effect on revenues but will save Johnny’s $16,500 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 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

Answer 1

rate positively ..

ans a)	What are the operating cash flows in each year
	Saving in cost =	16,500
Less	Depreciation =	11000
	33,000/3
	Earning before tax	5,500
	Tax @ 30%	1650
	Net income	3,850
	Operating cashflow	14,850
	Ans =		14,850
Ans b)	What are the total cash flows in each year
	Year	Investment	Operating cash flow	Post tax salvage value	Total cash flow
	0	-33000			-33000
	1		14,850		14850
	2		14,850		14850
	3		14,850	5775	20625
	Post tax salvage value= 8,250*(1-30%)
Ans c)	NPV computation
	Year	Total cash flow	PVIF @ 10%	present value
	0	-33000	1	$ (33,000.00)
	1	14850	0.909091	$   13,500.00
	2	14850	0.826446	$   12,272.73
	3	20625	0.751315	$   15,495.87
	NPV			$     8,268.60
Ans d)	Since NPV is positive therefore yes grill be purchased