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 $ 160 000. This machine will require $ 20 000 per year in ongoing maintenance expenses. b. Purchase a​ new, more advanced machine for $ 260 000. This machine will require $ 16 000 per year in ongoing maintenance expenses and will lower bottling costs by $ 15 000 per year.​ Also, $ 37 000 will be spent up front 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 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 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.

The NPV of renting the current machine is ​$ nothing. ​(Round to the nearest​ dollar.)

The NPV of purchasing the current machine is ​$ nothing. ​(Round to the nearest​ dollar.)

The NPV of purchasing the advanced machine is ​$ nothing. ​(Round to the nearest​ dollar.)

Which of the following is the best​ choice? ​ (Select the best choice​ below.)

A. Rent the current machine. B. Purchase the current machine. C. Purchase the advanced machine.

Answer 1