Question

Beryl's Iced Tea currently rents a bottling machine for $ 55 000per? 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 $ 155 000. This machine will require $ 25 000per year in ongoing maintenance expenses.

b. Purchase a? new, more advanced machine for $ 265 000. This machine will require $ 20 000per year in ongoing maintenance expenses and will lower bottling costs by $ 10 000per year.? Also, $39 000 will be spent up front 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 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 40 %.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

Answer 1

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