Beryl\'s leed Tea currently rents a bottling machine for $54,000 per year, inclu
ID: 2723999 • Letter: B
Question
Beryl's leed Tea currently rents a bottling machine for $54,000 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 $155.000 This machine will require $20,000 per year in ongoing maintenance expenses Purchase a new, more advanced machine for $260,000. This machine will require SI 6.000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year. Also. $39,000 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 rale is 30V 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 alternativeExplanation / Answer
Answer
Figures in $
Year
Maintenance Expenses
Saving in Bottling costs
Training cost
cost before tax
Cost After tax
Depreciation Tax Benefit
Purchase price
Cash flows
Disc Rate : 8%
Present value
A
B
C
D
E
F
G
I
J
A+B+C
D*(1-tax rate)
(260000/7)*0.3
E+F+G
I*J
0
-39000
-39000
-27300
-260000
-287300
1.00
-287300.00
1
-16000
12000
-4000
-2800
11142.86
8342.86
0.93
7724.87
2
-16000
12000
-4000
-2800
11142.86
8342.86
0.86
7152.66
3
-16000
12000
-4000
-2800
11142.86
8342.86
0.79
6622.83
4
-16000
12000
-4000
-2800
11142.86
8342.86
0.74
6132.25
5
-16000
12000
-4000
-2800
11142.86
8342.86
0.68
5678.01
6
-16000
12000
-4000
-2800
11142.86
8342.86
0.63
5257.42
7
-16000
12000
-4000
-2800
11142.86
8342.86
0.58
4867.98
8
-16000
12000
-4000
-2800
-2800.00
0.54
-1512.75
9
-16000
12000
-4000
-2800
-2800.00
0.50
-1400.70
10
-16000
12000
-4000
-2800
-2800.00
0.46
-1296.94
Net present cash outflow
-248074.39
Answer : Net Present Value of purchasing the advance machine is - $ 248074.39
Figures in $
Year
Maintenance Expenses
Saving in Bottling costs
Training cost
cost before tax
Cost After tax
Depreciation Tax Benefit
Purchase price
Cash flows
Disc Rate : 8%
Present value
A
B
C
D
E
F
G
I
J
A+B+C
D*(1-tax rate)
(260000/7)*0.3
E+F+G
I*J
0
-39000
-39000
-27300
-260000
-287300
1.00
-287300.00
1
-16000
12000
-4000
-2800
11142.86
8342.86
0.93
7724.87
2
-16000
12000
-4000
-2800
11142.86
8342.86
0.86
7152.66
3
-16000
12000
-4000
-2800
11142.86
8342.86
0.79
6622.83
4
-16000
12000
-4000
-2800
11142.86
8342.86
0.74
6132.25
5
-16000
12000
-4000
-2800
11142.86
8342.86
0.68
5678.01
6
-16000
12000
-4000
-2800
11142.86
8342.86
0.63
5257.42
7
-16000
12000
-4000
-2800
11142.86
8342.86
0.58
4867.98
8
-16000
12000
-4000
-2800
-2800.00
0.54
-1512.75
9
-16000
12000
-4000
-2800
-2800.00
0.50
-1400.70
10
-16000
12000
-4000
-2800
-2800.00
0.46
-1296.94
Net present cash outflow
-248074.39
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.