Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The compan
Posted: Tue Apr 26, 2022 10:49 am
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
alternate options: option a is to purchase the machine it is
currently renting for $165,000, which will require $20,000 per year
in ongoing maintenance expenses, or option b, which is to purchase
a new, more advanced machine for $250,000, which will require
$19,000 per year in ongoing maintenance expenses and will lower
bottling costs by $13,000 per year. Also, $38,000 will be spent
upfront 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 there will be a
negligible salvage value in 10 years' time (the end of each
machine's life). The marginal corporate tax rate is 38%. Should Big
Rock Brewery 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. (Note: the NPV
will be negative, and represents the PV of the costs of the machine
in each case.) .. The NPV (rent the machine) is $(Round to the
nearest dollar.) The NPV (purchase the current machine) is $ (Round
to the nearest dollar.) The NPV (purchase the advanced machine) is
$ (Round to the nearest dollar.) Which of the following is the best
choice? O A. Rent the current machine. O B. Purchase the current
machine. O C. Purchase the advanced machine.
per year, including all maintenance expenses. The company is
considering purchasing a machine instead and is comparing two
alternate options: option a is to purchase the machine it is
currently renting for $165,000, which will require $20,000 per year
in ongoing maintenance expenses, or option b, which is to purchase
a new, more advanced machine for $250,000, which will require
$19,000 per year in ongoing maintenance expenses and will lower
bottling costs by $13,000 per year. Also, $38,000 will be spent
upfront 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 there will be a
negligible salvage value in 10 years' time (the end of each
machine's life). The marginal corporate tax rate is 38%. Should Big
Rock Brewery 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. (Note: the NPV
will be negative, and represents the PV of the costs of the machine
in each case.) .. The NPV (rent the machine) is $(Round to the
nearest dollar.) The NPV (purchase the current machine) is $ (Round
to the nearest dollar.) The NPV (purchase the advanced machine) is
$ (Round to the nearest dollar.) Which of the following is the best
choice? O A. Rent the current machine. O B. Purchase the current
machine. O C. Purchase the advanced machine.