Question

​Beryl's Iced Tea currently rents a bottling machine for

$52,000

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

$$165,000.

This machine will require

$22,000

per year in ongoing maintenance expenses.

b. Purchase a​ new, more advanced machine for

$ 250000$250,000.

This machine will require

$$17,000

per year in ongoing maintenance expenses and will lower bottling costs by

$10,000

per year.​ Also,

$$40,000

will be spent upfront training the new operators of the machine.

Suppose the appropriate discount rate is

8 %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 a negligible salvage value. The corporate tax rate is

20 %20%.

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.

NPV of renting the machine?

NPV of option A?

NPV of option B?

Of the following what should I do

A)Should I purchase the advance machine

B)Rent the current machine?

C)Rent the Advanced machine?

D)Purchase the current machine?

Answer 1