Final answer:
To calculate the operating and total cash flows in each year for the new grill, we consider the energy cost savings, initial investment, and salvage value. The net present value (NPV) is calculated by discounting the cash flows back to their present value.
Step-by-step explanation:
To calculate the operating cash flows in each year, we need to determine the cash inflows and outflows that are directly related to the new grill. In this case, the only relevant cash flow is the $19,500 energy cost savings. Since this savings occurs every year for 3 years, the operating cash flows would be $19,500 for each year.
To calculate the total cash flows in each year, we need to consider both the operating cash flows and the salvage value of the grill. In year 1, the total cash flow would be $19,500 (operating cash flow) + $39,000 (initial investment). In year 5, the total cash flow would be $19,500 (operating cash flow) + $9,750 (salvage value). For years 2-4, the total cash flow would only be the $19,500 operating cash flow.
To calculate the net present value (NPV) of the cash flow stream, we need to discount the cash flows back to their present value using the discount rate of 10%. Once discounted, we can sum up the present values of all the cash flows to calculate the NPV. If the NPV is positive, it means the grill should be purchased since it would generate a return greater than the discount rate. If the NPV is negative, it means the grill should not be purchased.