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Capital Budgeting Techniques

Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $20,000 and will be depreciated in an asset class which carries a CCA rate of 30 percent. 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 firm has other assets in this asset class. The tax rate is 35 percent.

a. What are the operating cash flows in years 1 to 3 years?
b. What are total cash flows in years 1 to 3?
c. If the discount rate is 12 percent, should the grill be purchased?

STUDENT: expenses NOT one time, IT IS per annum

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Year0 Year 1 Year 2 Year 3
Cash Flows -15000 10000 10000 10000
After tax cash flows 6500 6500 6500
Salvage ...

Solution Summary

This explains the Net present value technique to evaluate the project.