Question
Beryl's Iced Tea currently rents a bottling machine for $ 52 comma 000 per year, including all maintenance expenses. It is considering purchasing a machine
Beryl's Iced Tea currently rents a bottling machine for
$ 52 comma 000
per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options:
A. Purchase the machine it is currently renting for
$ 160 comma 000
.
This machine will require
$ 21 comma 000
per year in ongoing maintenance expenses.
B. Purchase a new, more advanced machine for
$ 265 comma 000
.
This machine will require
$ 16 comma 000
per year in ongoing maintenance expenses and will lower bottling costs by
$ 15 comma 000
per year. Also,
$ 39 comma 000
will be spent upfront training the new operators of the machine.
Suppose the appropriate discount rate is
7 %
per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a ten-year life with a negligible salvage value. The marginal corporate tax rate is
38 %
.
Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? To make this decision, calculate the NPV of the FCF associated with each alternative. (Note: the NPV will be negative, and represents the PV of the costs of the machine in each case.)
The NPV of renting the machine is
$nothing
.
(Round to the nearest dollar. Enter a negative NPV as a negative value.)
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