Question
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
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 a is to purchase the machine it is currently renting for $150,000 which will require $22,000 per year in ongoing maintenance expenses, or option b, which is to purchase a new, more advanced machine for $265,000 which will require $19,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $38,000 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 45% and there will be a negligible salvage value in 10 years' time (the end of eachmachine's life). The marginal corporate tax rate is 35%. 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 PV of the costs of the machine in each case.)
1. The NPV (rent the machine) is $________
2. The NPV (purchase the current machine) is $________
3. The NPV (purchase the advanced machine) is $________
4. Which of the following is the best choice?
a. Purchase the advanced machine. b. Rent the current machine. c. Purchase the current machine.
I really really really need help on this question, ive been honestly stuck for hours. Please make the answers for each part in either clear writing or text, & ill leave a good rating as well. Thank you :)
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