Johnnys Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $31,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $7,750. The grill will have no effect on revenues but will save Johnnys $15,500 in energy expenses. The tax rate is 30%.

Required:

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

Year 1

Year 2

Year 3 b. What are the total cash flows in each year?

Time 0

Time 1

Time 2

Time 3 c. Assuming the discount rate is 11%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

NPV of Cash Flow stream

Should grill be purchased?