Use the following information to answer the question(s)below.
Two years ago,Krusty Krab Restaurant purchased a grill for $50,000.The owner,Eugene Krabs,has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill.This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years,after which it would have no salvage value.Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year.The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value.All other operating expenses are identical for both grills.The existing grill can be sold to another restaurant now for $30,000.Krusty Krab's tax rate is 21%.
-The incremental cash flow that Krusty Krab will incur today (Year 0)if they elect to upgrade to the new grill is closest to:
A)-$80,000.
B)-$50,000.
C)-$47,900.
D)+$30,000.

Question

Quizplus · Accepted Answer

The incremental cash flow can be calculated as the difference between the cash flows with the new grill and the cash flows with the existing grill, including the cost of purchasing and depreciating the new grill, and the proceeds from selling the existing grill.

Cash flow with new grill: 
EBITDA = $50,000 
Depreciation = $80,000/8 = $10,000 
EBT = $40,000 
Taxes = $8,400 (21% of $40,000) 
Net Income = $31,600 
Depreciation = $10,000 
Net Cash Flow = $41,600

Cash flow with existing grill: 
EBITDA = $35,000 
Depreciation = $50,000/10 = $5,000 
EBT = $30,000 
Taxes = $6,300 (21% of $30,000) 
Net Income = $23,700 
Depreciation = $5,000 
Net Cash Flow = $28,700

Incremental cash flow = $41,600 - $28,700 - $80,000 + $30,000 
= -$36,100 + $30,000 
= -$6,100

Therefore, the incremental cash flow that Krusty Krab will incur today (Year 0) if they elect to upgrade to the new grill is closest to $47,900 (Option C).

Use the Following Information to Answer the Question(s)below