Bistro Limited is a brewing company trying to decide whether to buy a new bottling machine...
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Bistro Limited is a brewing company trying to decide whether to buy a new bottling machine for £10.00m to save on rental costs which are currently £6.60m p.a. Running costs for the new machine would be £1.20m p.a. All cash flows are quoted in current terms and are expected to rise in line with the consumer's prices index at 5.3% p.a. The bottling machine has no resale value. Bistro's real cost of capital is 14%. Ignore tax. Required (a) (b) (c) (d) Evaluate whether the new bottling machine should be purchased if its life is expected to be 3 years, ignoring inflation Evaluate whether the new bottling machine should be purchased if its life is expected to be 3 years, including inflation Compare your answers to (a) and (b) Which would be the preferred approach to dealing with inflation if rental costs were expected to increase at 2% p.a.? (no extra calculations are needed here) Bistro Limited is a brewing company trying to decide whether to buy a new bottling machine for £10.00m to save on rental costs which are currently £6.60m p.a. Running costs for the new machine would be £1.20m p.a. All cash flows are quoted in current terms and are expected to rise in line with the consumer's prices index at 5.3% p.a. The bottling machine has no resale value. Bistro's real cost of capital is 14%. Ignore tax. Required (a) (b) (c) (d) Evaluate whether the new bottling machine should be purchased if its life is expected to be 3 years, ignoring inflation Evaluate whether the new bottling machine should be purchased if its life is expected to be 3 years, including inflation Compare your answers to (a) and (b) Which would be the preferred approach to dealing with inflation if rental costs were expected to increase at 2% p.a.? (no extra calculations are needed here)
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Answer rating: 100% (QA)
a Net present value 6 6 1 2 1 0 14 1 2 1 0 14 2 1 2 1 0 14 3 4 18 The machine should not ... View the full answer
Related Book For
Financial Accounting
ISBN: 978-0133427530
10th edition
Authors: Walter Harrison, Charles Horngren, William Thomas
Posted Date:
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