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Johnny's Lunches is considering purchasing a new, energy-efficient grill
Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $46,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $11,500. The grill will have no effect on revenues but will save Johnny's $23,000 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 12%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?
Expert Solution
a-b). Please see the attachment:
c). NPV of the grill = $27,653.11
Since, the NPV is positive. So, the grill should be purchased.
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