Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and

image text in transcribed
Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two alternate options: option is to purchase the machine it is currently renting for $165,000, which will require $23,000 per year in ongoing maintenance expenses, or option b, which is to purchase a new, more advanced machine for $260,000, which will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $39,000 will be spent upfront in training the new operators of the machine. Suppose the appropriate discount rate is 9% 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 45% and there will be a negligible salvage value in 10 years' time (the end of each machine's life). The marginal corporate tax rate is 30%. 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 alterative. (Note: the NPV will be negative, and represents the PV of the costs of the machine in each CASO The NPV (rent the machine) is S - 228830,46. (Round to the nearest dollar) The NPV (purchase the current machine) is $(Round to the nearest dollar.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jack Kapoor, Les Dlabay, Robert J. Hughes

7th Edition

0072866578, 9780072866575

More Books

Students also viewed these Finance questions