Beryl\'s lood Tea currently rents a bottling machine for $54,000 per yearincludi

Question

Beryl's lood Tea currently rents a bottling machine for $54,000 per yearincluding 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 $24,000 per year in ongoing maintenance expenses, b. Purchase a new, more advanced machine for $250,000. This machine will require $19,000 per year in ongoing maintenance expenses and will lower botting costs by $12000 per year. Also, S38,000 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 yearas is the cost of the rental machine. Assume also that the machines will be depreciated via the straightline 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 rentpurchase 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 s (Round to the nearest dollar. The NPV. of purchasing the current machine is so (Round to the nearest dollar.) The NPV of purchasing the advanced machine is $ . (Round to the nearest dollar) Which of the following is the best choice? Select the best choice below.) O A. Rent the current machine. OBPurchase the advanced machine. O C. Purchase the current machine.

Explanation / Answer

Here in the given question we must compare the expenses on each machine by which we can opt out the best machine. basis of opting the best machine is opting the lower cost.

In the given method marginal income tax rate application not taken.

by analysis of all option, option C(Purchase the current machine) is most beneficial as it has lower cost of expenses.

anslysis of option by using marginal income tax rate in calculation -

by analysing in this method option C(Purchase the current machine) is most beneficial as it has lower cost.

Please note all values are in $.

in case of any clarification required please comment.

Year 0 1 2 3 4 5 6 7 8 9 10 NPV option A Currently rent 54000 54000 54000 54000 54000 54000 54000 54000 54000 54000 Discouting @7% 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342 0.62275 0.582009 0.543934 0.508349 PV 50467.29 47165.69 44080.09 41196.34 38501.25 35982.48 33628.49 31428.49 29372.42 27450.86 379273.4 option B Initial purcahse 160000 maintinance exp 24000 24000 24000 24000 24000 24000 24000 24000 24000 24000 Discouting @7% 1 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342 0.62275 0.582009 0.543934 0.508349 PV of Cash Outflow 160000 22429.91 20962.53 19591.15 18309.49 17111.67 15992.21 14945.99 13968.22 13054.41 12200.38 328566 option C Initial Purcahse 250000 maintinance exp 19000 19000 19000 19000 19000 19000 19000 19000 19000 19000 Saving in bottling -12000 -12000 -12000 -12000 -12000 -12000 -12000 -12000 -12000 -12000 Operator expense 38000 Total expense 288000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 Discouting @7% 1 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342 0.62275 0.582009 0.543934 0.508349 288000 6542.056 6114.071 5714.085 5340.266 4990.903 4664.396 4359.248 4074.064 3807.536 3558.445 337165.1

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