Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $40,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $10,000. The grill will have no effect on revenues but will save Johnny’s $20,000 in energy expenses. The tax rate is 35%. a. What are the operating cash flows in years 1 to 3? b. What are total cash flows in years 1 to 3? c. If the discount rate is 12%, should the grill be purchased?
Solution
What are the operating cash flows in years 1 to 3
What are total cash flows in years 1 to 3
If the discount rate is 12%, should the grill be purchased?
As the NPV is Postive project may be Accepted
.
Johnnys Lunches is considering purchasing a new- energy-efficient gril.docx
1. Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost
$40,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for
scrap metal after 3 years for $10,000. The grill will have no effect on revenues but will save
Johnny’s $20,000 in energy expenses. The tax rate is 35%. a. What are the operating cash
flows in years 1 to 3? b. What are total cash flows in years 1 to 3? c. If the discount rate is 12%,
should the grill be purchased?
Solution
What are the operating cash flows in years 1 to 3
What are total cash flows in years 1 to 3
If the discount rate is 12%, should the grill be purchased?
As the NPV is Postive project may be Accepted
Ending
MACRS Depreciation Book
Year Rate Allowance Value
1 0.33 $13,200 $26,800
2 0.45 18,000 8,800
3 0.15 6,000 2,800
4 0.07 2,800 0
