Purchase the machine it is currently renting

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Reference no: EM1321920

Q. Beryl's Iced Tea currently rents a bottling machine for $50,000 every year, including all maintenance expenses. It is considering purchasing a machine instead also is comparing 2 options:

a. Purchase the machine it is currently renting for $150,000. This machine will require $20,000 every year in ongoing maintenance expense.

b. Purchase a new, more advanced machine for $250,000. This machine will require $15,000 every year in ongoing maintenance expenses also will lower bottling costs by $10,000 every year. Also, $35,000 will be spent upfront in training the new operators of the machine.

Assume the appropriate discount rate is 8% every year also the machine is purchased today. Maintenance also bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machine will be depreciated via the straight line method over seven years also that they have a 10 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?

Reference no: EM1321920

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