Question

Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $37,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $9,250. The grill will have no effect on revenues but will save Johnny's $18,500 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? Complete this question by entering your answers in the tabs below. Required C Required A Required B What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Operating Cash Flows Year 1 2
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Answer 1

a) Year b) Year NPV of cash flow stream Operating Cash Flow $16,650.00 $16,650.00 $16,650.00 $3,687.85 Yes Should the grill be purchased? 0 1 Total Cash Flows $37,000.00 $16,650.00 $16,650.00 $16,650.00 3

Workings: Year-o Year-5 $0 [Given] $0 [$37000 / 3 years] $0 Year-1 Year-2 $18,500 $18,500 $12,333 $12,333 $6,167 $6,167 $1,850 $1,850 $4,317 $4,317 $12,333 $12,333 $16,650.00 $16,650.00 Year-3 $18,500 $12,333 $6,167 $1,850 $4,317 $12,333| $16,650.00|| Annual savings in production costs Less: Depreciation Expenses Before-tax net savings in costs Less: Taxes @ 30% After-tax net savings Add back Depreciation Expenses a) Operating Cash Flow Cost of new equipment After-tax salvage value at the end b) Total Cash Flows (1) Discount factor @ 11% (2) Present Value (1) (2) $0 [Before-tax net savings in expenses x 30%] $0 $0 [Non-cash expense and so added back] $0.00 -$37,000.00 | -$37,000.00 1.00000 -$37,000 $16,650.00 $16,650.00 0.90090 0.81162 $15,000.00 $13,513.51 $16,650.00 0.73119 $12,174.34 $0.00 0.65873 $0.00 $6,475.00 [$9,250 x (1-30%) --> Entire value is taxable because book value is zero] $6,475.00 0.59345 |[1/(1+11%)"; 1/(1+11%)*; 1/(1+11%)*; 1/(1+11%)*; 1/(1+11%)*; 1/(1+11%)] $3,842.60 c) Net Present Value (NPV) $3,687.85 [Sum of present value figures from year-0 thru year-3, wihout considering scrap receipt that occurs after the useful life of the equipment] Positive NPV implies that the project is capable of recovering present value of all its cash outflows before expiry of the project's life itself. So, as the NPV is positive, this grill shall be purchased.