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Big Rock Brewery currently rents a botting machine for $54,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and
Big Rock Brewery currently rents a botting machine for $54,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two options a. Purchase the machine it is currently renting for $160,000. This machine will require $24,000 per year in ongoing maintenance expenses b. Purchase a new, more advanced machine for $250,000. This machine will require $20,000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year. Also, $37,000 will be spent upfront in 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 are subject to a CCA rate of 25% and there will be a negligible salvage value in ten years time (the end of each machine's ife). The marginal corporate tax rate is 30%. Should Big Rock Brewery continue re purchase it cu ent machine or urc as head an ea 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.)
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