Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $42,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $10,500. The grill will have no effect on revenues but will save Johnny’s $21,000 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?

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.