Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $50,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $12,500. The grill will have no effect on revenues but will saveJohnny's $25,000 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 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 ARequired BRequired CAssuming the discount rate is 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill bepurchased? (Do not round intermediate calculations. Round your answer to 2 decimal places.)NPV of cash flow streamShould the grill be purchased?< Required BRequired C>

Calculation of operating cash flow and total cash flows 1 to 5 years Particulars Year 1 Year 2…

Answered: Required: a. What are the operating…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $50,000 and will be depreciated straight-
line over 3 years. It will be sold for scrap metal after 5 years for $12,500. The grill will have no effect on revenues but will save
Johnny's $25,000 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 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 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
Should the grill be purchased?
< Required B
Required C>

Expert Solution

Solution:-

Calculation of operating cash flow and total cash flows 1 to 5 years

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Annual savings	$25,000	$25,000	$25,000	$25,000	$25,000
Less: depreciation	$16,666.67	$16,666.67	$16,666.67
Saving before tax	$8,333.33	$8,333.33	$8,333.33	$25,000	$25,000
Less: tax 30%	$2,450	$2,450	$2,450	$7,500	$7,500
Saving after tax	$5,883.33	$5,883.33	$5,883.33	$17,500	$17,500
Add: depreciation	$16,666.67	$16,666.67	$16,666.67
(a) Operating CF	$22,500	$22,500	$22,500	$17,500	$17,500
After tax salvage					$8,750
(b) Total cash flow	$22,500	$22,500	$22,500	$17,500	$26,250

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