Johnnys Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $40,000 and will be

Question:

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $40,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $10,000. The grill will have no effect on revenues but will save Johnny’s $20,000 in energy expenses. The tax rate is 35%. a. What are the operating cash flows in years 1 to 3?

b. What are total cash flows in years 1 to 3?

c. If the discount rate is 12%, should the grill be purchased?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...