Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner, Eugene...
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Two years ago the 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 an operating income of $50,000 per year for the next eight years while the existing grill produces an operating income 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. The Krusty Krab's tax rate is 35%.
(1) Calculate the free cash flow in year 0 for the grill replacement proposal
(2) Calculate the free cash flow in year 1
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