John, the hapless manager of John’s Barbecue is considering replacing his old barbecue with a newer and more efficient model. The old barbecue was…

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John, the hapless manager of John’s Barbecue is considering replacing his old barbecue with a newer and more efficient model. The old barbecue was purchased for $100,000 two years ago. It is now fully depreciated but it is still functional and has an estimated salvage value of $40,000 now and $10,000 after the five remaining years that John plans to run the business.

John is considering buying a new barbecue at a cost of $200,000. The cost would be buffered by sale of the old barbecue. The new barbecue has an estimated salvage value of $60,000 after 5 years of use.  It requires an increase in the average inventory of charcoal of $10,000, but it is projected to cause cost savings of $30,000 per year.

If John buys the new barbecue (which is very big) it will need to be housed in a currently unused portion of the business’s building. John has had offers from other businesses to rent that space for $10,000 a year but he has been (and continues to be) unwilling to allow “outsiders” access to his property.

The marginal tax rate is 30%.  The new machine will be depreciated on a “3-year” IRS schedule.  The IRS schedule is 30.00%, 40.00%, 20.00%, and 10.00% in years 1-4, respectively.

Because John realizes that he is financially incompetent, he asks that you analyze this decision.  Please set up the cash flow totals by year.


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