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? & Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required A Required B Required C Assuming the discount rate is 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV of cash flow stream 8,422.31 X $ Yes Should the grill be purchased?

Answer 1

Year 0 1 2 Initial investment (37,500.00) Cash flow 18,500.00 18,500.00 18,500.00 18,500.00 18,500.00 5,550.00 Тах 5,550.00 5,550.00 5,550.00 5,550.00 Cash flow after tax 12,950.00 12,950.00 12,950.00 12,950.00 12,950.00 Saving due to depreciation 3,750.00 3,750.00 3,750.00 After tax cashflow on sale of scrap 6,475.00 Total savings (37,500.00) 16,700.00 16,700.00 16,700.00 12,950.00 19,425.00 Discount Factor 1.000000 0.900901 0.811622 0.731191 0.658731 0.593451 Discounted Cash flow (37,500.00) 15,045.05 13,554.09 12,210.90 8,530.57 11,527.79 NPV 23,368.39

Saving due to depreciation = Depreciation * Tax Rate

= (37500/3) * 30% = $3,750

After tax cash flow on sale of scrap = $9,250(1-0.30) = $6,475

Discount Factor formula:

$Discount~Factor = \frac{1}{(1+i)^n}$

Where,
i = discount rate
n = number of periods

Excel formulas: (refer only if you want to try in excel, otherwise ignore)

C D E F G н 1 Year 0 1 2 3 4 5 2 Initial investment -37500 0 0 0 3 Cash flow 0 18500 18500 18500 18500 18500 =+D3* 30 % +E3* 30% +F3 * 30 % 4 Tax +G3*30% +H3* 30% 0 +E3 - E4 5 Cash flow after tax +D3 - D4 +F3- F4 +G3- G4 +H3-H4 37500/3)*30% (37500/3)*30 % 37500/3)*30 % 6 Saving due to depreciation 7 After tax cashflow on sale of scrap 8 Total savings 0 0 -9250*70% 0 0 0 0 +F5+ F6+F7 +C2 = +D5+ D6 + D7 +E5+E6+E7 +G5+G6+G7 +H5+H6+H7 +C9 /1.11 +D8 D9 +D9/ 1.11 +G9/ 1.11 9 Discount Factor +E9/1.11 +F9/1.11 1 10 Discounted Cash flow +C8 C9 +E8#E9 -+F8# F9 +G8#G9 +H8*H9 11 NPV +SUM(C10:H10) 12 13