Question

9. Big Rock Brewery currently rents a bottling machine for $ 54 comma 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 $ 155 comma 000​, which will require $ 22 comma 000 per year in ongoing maintenance​ expenses, or option​ b, which is to purchase a​ new, more advanced machine for $ 265 comma 000​, which will require $ 20 comma 000 per year in ongoing maintenance expenses and will lower bottling costs by $ 11 comma 000 per year.​ Also, $ 40 comma 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 25 % and there will be a negligible salvage value in 10​ years' time​ (the end of each​ machine'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.)

Answer 1

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ANSWER : PURCHASE CURRENT MACHINE