Beryl's Iced Tea currently rents a bottling machine for $ 5 0 comma 0 0 0 per
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Question:
Beryl's Iced Tea currently rents a bottling machine for $ comma per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options:
a Purchase the machine it is currently renting for $ comma This machine will require $ comma per year in ongoing maintenance expenses.
b Purchase a new, more advanced machine for $ comma This machine will require $ comma per year in ongoing maintenance expenses and will lower bottling costs by $ comma per year. Also, $ comma will be spent up front to train the new operators of the machine.
Suppose the appropriate discount rate is 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 straightline method over seven years and that they have ayear life with a negligible salvage value. The marginal corporate tax rate is
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.
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