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Beryl's Iced Tea currently rents a bottling machine for $ 5 2 , 0 0 0 per year, including all maintenance expenses. It is considering
Beryl's Iced Tea currently rents a bottling machine for $ 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 $ This machine will require $ per year in ongoing
maintenance expenses.
b Purchase a new, more advanced machine for $ This machine will require $ per year in ongoing
maintenance expenses and will lower bottling costs by $ per year. Also, $ will be spent up front to train
the new operators of the machine.
Suppose the appropriate discount rate is per year and the machine is purchased today. Maintenance and bottling
costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be
depreciated via the straightline method over seven years and that they have a year life with a negligible salvage
value. The marginal corporate tax rate is
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.
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