Beryl\'s Iced Tea currently rents a bottling machine for $53,000 per year, inclu

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 $165,000 This machine will require $25,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $255,000. This machine will require $19,000 per year in ongoing maintenance expenses and will lower bottling costs by $10,000 per year. Also, $35,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 9% 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 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. The NPV of renting the current machine is (Round to the nearest dollar

Explanation / Answer

Renting the Machine

Annual outflow=53000*6.41=339730

Purchase the Machine

Purchase the advanced

NPV=366518 outflow

The company should purchase the machine because the cash outflow for 10 years is minimum i.e. 2,80,195 $

Particulars Purchase Cost 165000 1 165000 Maintenance Expense 25000 6.41 160250 Savings in Tax 8957(165000/7*38%) 5.03 (45055) Net Present Value (280195)

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