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solution

You are allowed to work in groups of 2-4 students, but you must submit
the exercise individually on iLearn before the due date. Please include
group member names. You must show your work and complete all parts of
the problem to receive credit.
Solutions will be posted on iLearn after
the due date.
Problem:
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 (allowance
percentages 33%, 45%, 15%, 7%). 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 each year. The grill will
require an increase in net operating working capital of $2,000. The tax
rate is 35%.
Q1: What is the initial investment cash flow at t=0?
Q2:
What is the operating cash flow in year 1? The operating cash flow for
year 2 equals $19,300. The operating cash flow for year 3 equals
$15,100.
Q3: What is the total terminal (non-operating) cash flow in
year 3?
Q4: Calculate the project’s net cash flows. If the discount rate
is 12%, should the grill be purchased?

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