Question
Beryl's Iced Tea currently rents a bottling machine for $ 52 000 $52000 peryear, including all maintenance expenses. It is considering purchasing a machine instead
Beryl's Iced Tea currently rents a bottling machine for $ 52 000
$52000 peryear, including all maintenance expenses. It is considering purchasing a machine instead and is comparing twooptions:
a. Purchase the machine it is currently renting for $ 155 000
$155000. This machine will require $ 23 000
$23000 per year in ongoing maintenance expenses.
b. Purchase anew, more advanced machine for $ 255 000
$255000. This machine will require $ 20 000
$20000 per year in ongoing maintenance expenses and will lower bottling costs by $ 14 000
$14000 per year.Also, $ 36 000
$36000 will be spent up front training the new operators of the machine.
Suppose the appropriate discount rate is 9 %
9% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of eachyear, as is the rental of the machine. Assume also that the machines will be depreciated via thestraight-line method over seven years and that they have aten-year life with a negligible salvage value. The marginal corporate tax rate is 38 %
38%.
ShouldBeryl's Iced Tea continue torent, purchase its currentmachine, or purchase the advancedmachine? To make thisdecision, calculate the NPV of the FCF associated with each alternative.
The NPV of renting the current machine is $
nothing
. (Round to the nearestdollar.)
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