Question

Pepsi is renting a machine for

$50,000

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 $155,000​,which will require $22,000 per year in ongoing maintenance​ expenses, or option​ b, which is to purchase a​ new, more advanced machine for $265,000​, which will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year.​ Also, $35,000 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 30%. 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.)

1. The NPV​ (rent the​ machine) is ____ ​$.

​2. The NPV​ (purchase the current​ machine) is _______.

3. The NPV​ (purchase the advanced​ machine) is ________

4. Which of the following is the best​ choice?  

A. Rent the current machine.

B. Purchase the current machine.

C. Purchase the advanced machine.

Answer 1

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