Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $20,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $5,000. The grill will have no effect on revenues but will save Johnny’s $10,000 in energy expenses. The tax rate is 35 percent.
a. What are the operating cash flows in Years 1–3?
b. What are total cash flows in Years 1–3?
c. If the discount rate is 12 percent, should the grill be purchased?