Beryl\'s Iced Tea currently rents a bottling machine for $53,000 per year, inclu
ID: 2723875 • Letter: B
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: Purchase the machine it is currently renting for $160,000. This machine will require $25,000 per year in ongoing maintenance expenses. Purchase a new, more advanced machine for $255,000. This machine will require S15,000 per year in ongoing maintenance expenses and will lower bottling costs by $13,000 per year. Also, $36,000 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 35%. 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.Explanation / Answer
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Option renting Tax Rate =35% Post Tax cost of renting =53000*0.65=34450 Post Tax cost of Renting 34,450 34,450 34,450 34,450 34,450 34,450 34,450 34,450 34,450 34,450 PV factor @7%= 1 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 PV of rental cost 32,196 30,090 28,121 26,282 24,562 22,955 21,454 20,050 18,739 17,513 NPV of Rental cost 241,962 Purchase the current Machine Cost of Machine 160,000 Maintenance expense 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 Depreciation Tax shield @depreciation*35%= (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) (8,000) Net Cash Cost 160,000 17,000 17,000 17,000 17,000 17,000 17,000 17,000 25,000 25,000 25,000 PV factor @7%= 1 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 PV of costs 160,000 15,888 14,848 13,877 12,969 12,121 11,328 10,587 14,550 13,598 12,709 NPV of costs 292,475 New Machine purchase Cost of Machine 255,000 Operator training expenses 36,000 Maintenance expense 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Reduction in bottling cost (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) (13,000) Depreciation Tax shield @depreciation*35%= (12,750) (12,750) (12,750) (12,750) (12,750) (12,750) (12,750) (12,750) (12,750) (12,750) Net Cash cost 291,000 (10,750) (10,750) (10,750) (10,750) (10,750) (10,750) (10,750) (10,750) (10,750) (10,750) PV factor @7%= 1 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 PV of costs 291,000 (10,047) (9,389) (8,775) (8,201) (7,665) (7,163) (6,695) (6,257) (5,847) (5,465) NPV of costs 215,496 Breyl's should purchase the advanced machine as the NPV of the cost is the lowest . NPV of renting current machine is $241,962
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.