Reference no: EM133491906
Question: ?Beryl's Iced Tea currently rents a bottling machine for $53,000 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 $155,000. This machine will require $22,000 per year in ongoing maintenance expenses.
B. Purchase a? new, more advanced machine for $265,000. This machine will require $18,000 per year in ongoing maintenance expenses and will lower bottling costs by $14,000 per year.? Also, $36,000 will be spent upfront training 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 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
38%. 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.)
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