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?
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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text: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
What are the total cash flows in each year? (Negative amounts should be indicated with a minus sign. Do not round
intermediate calculations. Round your answers to 2 decimal places.)
Time
Total Cash Flows
1
2
< Required A
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 | $25,000.00 | $25,000.00 | $25,000.00 | $25,000.00 | $25,000.00 |
| Less: depreciation | $16,666.67 | $16,666.67 | $16,666.67 | ||
| Saving before tax | $8,333.33 | $8,333.33 | $8,333.33 | $25,000.00 | $25,000.00 |
| Less: tax 30% | $2,450.00 | $2,450.00 | $2,450.00 | $7,500.00 | $7,500.00 |
| Saving after tax | $5,883.33 | $5,883.33 | $5,883.33 | $17,500.00 | $17,500.00 |
| Add: depreciation | $16,666.67 | $16,666.67 | $16,666.67 | ||
| (a) Operating CF | $22,500.00 | $22,500.00 | $22,500.00 | $17,500.00 | $17,500.00 |
| After tax salvage | $8,750.00 | ||||
| (b) Total cash flow | $22,500.00 | $22,500.00 | $22,500.00 | $17,500.00 | $26,250.00 |
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