Final answer:
The operating cash flows in each year for Johnny’s Lunches are $16,000. The total cash flows in each year are the savings in energy expenses plus the cash flow from the sale of the grill for scrap metal. The net present value (NPV) of the cash flow stream can be calculated by discounting the cash flows at a rate of 12% and subtracting the initial cost of the grill.
Step-by-step explanation:
To calculate the operating cash flows in each year for Johnny’s Lunches, we need to consider the savings in energy expenses. Since the grill will save Johnny’s $16,000 in energy expenses, the operating cash flows for each year will be $16,000.
To calculate the total cash flows in each year, we need to consider both the savings in energy expenses and the cash flow from the sale of the grill for scrap metal. We can calculate the total cash flows by adding the savings in energy expenses and the scrap metal value of $8,000.
To calculate the net present value (NPV) of the cash flow stream, we need to discount the cash flows at a rate of 12% and then subtract the initial cost of the grill. The NPV can be calculated using the formula: NPV = -Initial cost + (Cash flow Year 1 / (1 + Discount rate)^1) + (Cash flow Year 2 / (1 + Discount rate)^2) + (Cash flow Year 3 / (1 + Discount rate)^3) + (Cash flow Year 4 / (1 + Discount rate)^4) + (Cash flow Year 5 / (1 + Discount rate)^5).
Based on the calculations, we can determine whether the grill should be purchased.