Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Use the info above to find: The NPV of renting the machine The NPV of option A The NPV of option B (After finding those,

image text in transcribed

Use the info above to find:

  1. The NPV of renting the machine
  2. The NPV of option A
  3. The NPV of option B
  4. (After finding those, answer this question) Which of the following is the best choice?
    1. Rent the advanced machine
    2. Purchase the current machine
    3. Rent the current machine
    4. Purchase the advanced machine
Beryl's Iced Tea currently rents a bottling machine for $51,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $155,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $18,000 per year in ongoing maintenance expenses and will lower bottling costs by $13,000 per year. Also, $37,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 8% 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 will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? Note: To make this decision, calculate the NPV of the FCF associated with each alternative. The NPV will be negative, and represents the PV of the costs of the machine in each case

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

Step: 3

blur-text-image

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

Entrepreneurial Finance

Authors: Gary E. Gibbons, Robert D. Hisrich, Carlos Marques DaSilva

1st Edition

1452274177, 978-1452274171

More Books

Students also viewed these Finance questions