Question

​Beryl's Iced Tea currently rents a bottling machine for $ 53000 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 $ 150000. This machine will require $ 20000 per year in ongoing maintenance expenses. B. Purchase a​ new, more advanced machine for $ 250000. This machine will require $ 15000 per year in ongoing maintenance expenses and will lower bottling costs by $ 10000 per year.​ Also, $ 40000 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​ ten-year life with a negligible salvage value. The marginal corporate tax rate is 30 %. Should​ Beryl's Iced Tea 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.)

Answer 1