Beryl’s Iced Tea currently rents a bottling machine for 52,000 peryear, including all maintenance expenses. It isconsideringpurchasing a machine instead, and comparing two options
A. Purchase the machine it is currently renting for $165,000.This machine will require $23,000 per year in ongoing maintenanceexpenses.
B. Purchase a new, more advanced machine for $255,000. Thismachine will require $18,000 per year in ongoing maintenanceexpenses and will lower bottling costs by $15,000 per year. Also,$38,000 will be spent upfront training the new operators of themachine. Suppose the appropriate discount rate is 9% per year andthe machine is purchased today. Maintenance and bottling costs arepaid at the end of each year, as is herental of the machine. Assumealso that the machines will depreciate via the straight-line methodover seven years and that they have a en year lfe with a negligiblesalvage value. The marginal corporate tax rate is 40%. Should BerylIced Tea continue to rent, purchase it’s machine, or purchasetheadvanced machine? To make this decision, calculate the NPV ofthe FCF associated with each alternative. (Note: the NPV will benegative, and represents the PV of the costs of the machine in eachcase.)
The NPV of renting the machine is $ (Round to the nearestdollar. Enter a negative NPV as a negative value.)
The NPV of option A is $ (Round to the nearest dollar. Enter anegative NPV as a negative value)
The NPV of option B is $ (Round to the nearest ollar. Enter anegative NPV as a negative value)
Which of the following is the best choice?
A. Rent the current machine
B. Purchase the advanced machine
C. Purchase the current machine
D. Rent the advance machine
