Beryl's Iced Tea currently rents a bottling machine for $52,000 per year, including all maintenance expenses. 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 $21,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $20,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $37,000 will be spent up front to train 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 cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 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. GETXOR The NPV of renting the current machine is $-209355 (Round to the nearest dollar.).
Beryl's Iced Tea currently rents a bottling machine for $52,000 per year, including all maintenance expenses. 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 $21,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $20,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $37,000 will be spent up front to train 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 cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 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. GETXOR The NPV of renting the current machine is $-209355 (Round to the nearest dollar.).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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 $160,000. This machine will require $21,000 per year in ongoing
maintenance expenses.
b. Purchase a new, more advanced machine for $250,000. This machine will require $20,000 per year in ongoing
maintenance expenses and will lower bottling costs by $15,000 per year. Also, $37,000 will be spent up front to train 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 cost of the rental machine. Assume also that the machines will be
depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage
value. The marginal corporate tax rate is 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.
ALEXID
The NPV of renting the current machine is $-209355 (Round to the nearest dollar.)
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