Question

?Beryl's Iced Tea currently rents a bottling machine for $ 52 comma 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 $ 165 comma 000. This machine will require $ 23 comma 000 per year in ongoing maintenance expenses. b. Purchase a? new, more advanced machine for $ 250 comma 000. This machine will require $ 20 comma 000 per year in ongoing maintenance expenses and will lower bottling costs by $ 14 comma 000 per year.? Also, $ 39 comma 000 will be spent up front to train 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 cost of the rental machine. Assume also that the machines will be depreciated via the? straight-line method over seven years and that they have a? 10-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.

Answer 1

Decision : Purchase advanced machine