Question

​Beryl's Iced Tea currently rents a bottling machine for $54,000 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 $150,000. This machine will require $22,000 per year in ongoing maintenance expenses.

B. Purchase a​ new, more advanced machine for $265,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year.​ Also,$39,000 will be spent upfront on 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 negligible salvage value. The marginal corporate tax rate is 35%.

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.)

The NPV of renting the machine is $______?

The NPV of Option A is $_______?

The NPV of Option B is $________?

Which of the following is the best choice?

A.Purchase the Advanced Machine

B.Rent the current Machine

C.Purchase the Current Machine

D.Rent the Advanced Machine

Answer 1

The NPV of renting the machine is $ 235,523.81

The NPV of Option A is $ 206,906.37

The NPV of Option B is $ 238,811.81

The best choice is option C) Purchase the current machine

Berly's Iced should purchase it's current machine because NPV is lower for it.