Question

​Beryl's Iced Tea currently rents a bottling machine for $ 52,000 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 $ 155,000. This machine will require $ 22,000 per year in ongoing maintenance expenses. b. Purchase a​ new, more advanced machine for $ 250,000. This machine will require $ 16,000 per year in ongoing maintenance expenses and will lower bottling costs by $ 15,000 per year.​ Also, $ 38,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 9 % 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​ straight-line method over seven years and that they have a​ 10-year life with a negligible salvage value. The marginal corporate tax rate is 30 %. 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. The NPV of renting the current machine is ​$ ??? ​(Round to the nearest​ dollar.)

Answer 1

1]	NPV of renting = -52000*(1-30%)*(1.09^10-1)/(0.09*1.09^10) =	$           -2,33,603
2]	Purchasing the currently rented machine:
	Initial cost	$           -1,55,000
	PV of after maintenance costs = -22000*(1-30%)*(1.09^10-1)/(0.09*1.09^10) =	$               -98,832
	PV of depreciation tax shield = (155000/7)*30%*(1.10^7-1)/(0.1*1.1^7) =	$                 32,340
	NPV	$           -2,21,492
3]	Purchasing the new advanced machine:
	Initial cost of purchase	$           -2,50,000
	Initial after tax training cost = 38000*(1-30%) =	$               -26,600
	PV of after tax maintenance costs = -16000*(1-30%)*(1.09^10-1)/(0.09*1.09^10) =	$               -71,878
	PV of after tax savings in bottling costs = 15000*(1-30%)*(1.09^10-1)/(0.09*1.09^10) =	$                 67,385
	PV of depreciation tax shield = (250000/7)*30%*(1.10^7-1)/(0.1*1.1^7) =	$                 52,162
	NPV	$           -2,28,931
4]	DECISION:
	Purchasing the currently rented machine is the best option as
	it has the lowest negative NPV.