Question

Johnnys 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%.

a. What are the operating cash flows in each year?

Answer 1

The operating cash flows for each year are $50,000, -$16,667, -$16,667, -$16,667, $12,500.

Step-by-step explanation:

To calculate the operating cash flows each year, we need to consider the cost of the grill, its salvage value, and the savings in energy expenses.

Year 0: The initial cash outflow is the cost of the grill, which is $50,000.

Year 1-3: The annual depreciation expense is calculated by dividing the cost of the grill by the useful life. In this case, it would be $50,000 / 3 = $16,667 per year. There are no other cash flows in these years.

Year 4: The grill is sold for scrap metal, generating a cash inflow of $12,500.

Year 5: There are no cash flows in this year.