Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The

Question:

Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two options:

a. Purchase the machine it is currently renting for $150,000. This machine will require $20,000 per year in ongoing maintenance expenses.

b. Purchase a new, more advanced machine for $250,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $10,000 per year. Also, $35,000 will be spent up front in training 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 rental of the machine. Assume also that the machines are subject to a CCA rate of 25% and will have negligible salvage value in ten year's time (the end of each machine's life). The marginal corporate tax rate is 35%. Should Big Rock Brewery continue to rent, purchase its current machine, or purchase the advanced machine?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...