Beryl's Iced Tea currently rents a bottling machine for $55,000 peryear, including all maintenance expenses. It is
Question:
Beryl's Iced Tea currently rents a bottling machine for $55,000 peryear, including all maintenance expenses. It is considering purchasing a machineinstead, and is comparing twooptions:
a. Purchase the machine it is currently renting for$165,000. This machine will require $23,000 per year in ongoing maintenance expenses.
b. Purchase anew, more advanced machine for $260,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year.Also, $38,000 will be spent upfront training 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 eachyear, as is the rental of the machine. Assume also that the machines will be depreciated via thestraight-line method over seven years and that they have aten-year life with a negligible salvage value. The corporate tax rate is 20%. ShouldBeryl's Iced Tea continue torent, purchase its currentmachine, or purchase the advancedmachine? To make thisdecision, calculate the NPV of the FCF associated with each alternative.
Note: the NPV will benegative, and represents the PV of the costs of the machine in each case.
Can you please help to explain where you get the number in FCF and NPV, why is that number? thank you!