Beryl's Iced Tea currently rents a bottling machine for $55,000 per year, including all maintenance expenses. It isconsidering 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 ongoingmaintenance expenses.b. Purchase a new, more advanced machine for $260,000. This machine will require $17,000 per year in ongoingmaintenance expenses and will lower bottling costs by $13,000 per year. Also, $40,000 will be spent up front to trainthe new operators of the machine.Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottlingcosts are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will bedepreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvagevalue. The marginal corporate tax rate is 25%.Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? To makethis decision, calculate the NPV of the FCF associated with each alternative.The NPV of renting the current machine is $ -289723. (Round to the nearest dollar.)The NPV of purchasing the current machine is $ -(Round to the nearest dollar.)

The company has 3 options , one it can continue to rent the machine, second it can purchase the…

Answered: Beryl's Iced Tea currently rents a…

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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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 $150,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $255,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year. Also, $38,000 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 10-year life with a negligible salvage value. The corporate tax rate is 28%. Should Beryl's Iced Tea continue…
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1.
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 $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $35,000 will be spent up front to train 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 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 25%. The NPV of renting…
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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 $150,000. This machine will require $20,000 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 $15,000 per year. Also, $35,000 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 7 years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue to…

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