Question 3

Yessy Iced Coffee is currently renting a bottling machine for $30,000 per year. This machine requires $20,000 per year in maintenance cost. Yessy is considering purchasing a bottling machine instead and is comparing two options:

(i) Purchase the machine it is currently renting for $150,000.

(ii) Purchase a new, more advanced machine for $250,000. This machine will require $15,000 per year in on-going maintenance expenses and will lower bottling costs

by $10,000 per year. Also, $35,000 will be spent upfront in training the new operators of the machine.

Suppose the appropriate discount rate is 8%pa and all cash flows are paid / received at the end of each year. Assume also that the machines will be depreciated via the straight-line method over seven years and that they both have a ten-year useful life with a negligible salvage value. The corporate tax rate is 30%. Should Yessy Iced Coffee continue to rent,purchase its current machine, or purchase the advanced machine?