Question

Beryl’s Iced Tea currently rents a bottling machine for 52,000 per year, including all maintenance expenses. It isconsidering purchasing a machine instead, and comparing two options

A. Purchase the machine it is currently renting for $165,000. This machine will require $23,000 per year in ongoing maintenance expenses.

B. Purchase a new, more advanced machine for $255,000. This machine will require $18,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $38,000 will be spent upfront 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 herental of the machine. Assume also that the machines will depreciate via the straight-line method over seven years and that they have a en year lfe with a negligible salvage value. The marginal corporate tax rate is 40%. Should Beryl Iced Tea continue to rent, purchase it’s machine, or purchase theadvanced 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.)

The NPV of renting the machine is $ (Round to the nearest dollar. Enter a negative NPV as a negative value.)

The NPV of option A is $ (Round to the nearest dollar. Enter a negative NPV as a negative value)

The NPV of option B is $ (Round to the nearest ollar. Enter a negative NPV as a negative value)

Which of the following is the best choice?

A. Rent the current machine

B. Purchase the advanced machine

C. Purchase the current machine

D. Rent the advance machine

Answer 1