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Big Rock Brewery currently rents a bottling machine for $ 5 2 , 0 0 0 per year, including all maintenance expenses. The company is
Big Rock Brewery currently rents a bottling machine for $ per year, including all maintenance expenses. The
company is considering purchasing a machine instead and is comparing two alternate options: option a is to purchase
the machine it is currently renting for $ which will require $ per year in ongoing maintenance expenses,
or option b which is to purchase a new, more advanced machine for $ which will require $ per year in
ongoing maintenance expenses and will lower bottling costs by $ per year. Also, $ will be spent upfront in
training 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 rental of the machine.
Assume also that the machines are subject to a CCA rate of and there will be a negligible salvage value in
years' time the end of each machine's life The marginal corporate tax rate is Should Big Rock Brewery 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 of the costs of the
machine in each case.
The NPV rent the machine is $Round to the nearest dollar.
The NPV purchase the current machine is $Round to the nearest dollar.
The NPV purchase the advanced machine is $Round to the nearest dollar.
Which of the following is the best choice?
A Purchase the advanced machine.
B Purchase the current machine.
C Rent the current machine.
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