Question

​Beryl's Iced Tea currently rents a bottling machine for

$ 54 comma 000$54,000

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

$ 160 comma 000$160,000.

This machine will require

$ 22 comma 000$22,000

per year in ongoing maintenance expenses.

b. Purchase a​ new, more advanced machine for

$ 255 comma 000$255,000.

This machine will require

$ 18 comma 000$18,000

per year in ongoing maintenance expenses and will lower bottling costs by

$ 15 comma 000$15,000

per year.​ Also,

$ 36 comma 000$36,000

will be spent up front to train the new operators of the machine.

Suppose the appropriate discount rate is

8 %8%

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

38 %38%.

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.

Answer 1

Purchase the current machine is the best option

NPV of renting =

-224653.53

NPV of buying current machine =

-206304.47

NPV of buying advanced machine =

-217729.71

Option Rent			Purchase the machine it is currently renting						Purchase the advanced machine
Year	Rent after tax		Year	Initial cost	Maintenance after tax	Tax shield on depreciation	NetCF		Year	Initial cost+Training cost after tax	Savings and Maintenance after tax	Tax shield on depreciation	NetCF
0	0		0	-160000			-160000.00		0	-277320			-277320.00
1	-33480		1		-13640	8685.71	-4954.29		1		-1860	13842.86	11982.86
2	-33480		2		-13640	8685.71	-4954.29		2		-1860	13842.86	11982.86
3	-33480		3		-13640	8685.71	-4954.29		3		-1860	13842.86	11982.86
4	-33480		4		-13640	8685.71	-4954.29		4		-1860	13842.86	11982.86
5	-33480		5		-13640	8685.71	-4954.29		5		-1860	13842.86	11982.86
6	-33480		6		-13640	8685.71	-4954.29		6		-1860	13842.86	11982.86
7	-33480		7		-13640	8685.71	-4954.29		7		-1860	13842.86	11982.86
8	-33480		8		-13640		-13640.00		8		-1860		-1860.00
9	-33480		9		-13640		-13640.00		9		-1860		-1860.00
10	-33480		10		-13640		-13640.00		10		-1860		-1860.00
NPV	-224653.53					NPV	-206304.47					NPV	-217729.71

AutoSaver HD Book1 - Excel Sign in - 0 X File Home Insert Draw Page Layout Formulas Data Review View Help Tell me what you want to do Comments Share AY X = = = 0 O Calibri BIU - - -9 - Insert - Delete - Format -A A - A- General $ -% Paste - 48-58 . Conditional Format as Formatting Table - Cell Styles Sort & Find & Filter - Select Editing Clipboard Font Alignment Number Styles Cells X - A B Option Rent Year Rent after tax f =-255000-36000*(1-38%) C D E F Purchase the machine it is currently renting Year Initial cost Maintenance Tax shield on NetCF after tax depreciation н тік MN Purchase the advanced machine Year Initial cost+Training cost af Savings and Maintenance Tax shield on NetCF after tax depreciation 0 - 160000 0 300 4 1 =-54000*(1-38%) 5 2 =-54000*(1-38%) 63 =-54000*(1-38%) 7 1 - 54000*(1-38%) 8 5 =-57000*(1-38%) 9 6 =-54000*(1-38%) 107 =-54000*(1-38%) 11 8 =-54000*(1-38%) 12 9 =-54000*(1-38%) 13 10 --54000*(1-38%) SUM(3:43) =- 22000*(1-38%) =38%*160000/7 =SUM(E4:54) =-22000*(1-38%) =38%*160000/7 =SUMES:65) =-22000*(1-38%) -38%*160000/7 =SUM(EG:GG) =-22000*(1-38%) =38%160000/7 =SUME7:67) =-22000*(1-38%) =38%*160000/7 =SUM(E8:68) =-22000*(1-38%) =38%* 160000/7 =SUMES:G9) =-22000*(1-38%) -38%*160000/7 =SUM(E10:10) =- 22000*(1-38%) =SUM(L11:G11) =-22000*(1-38%) -SUM(E12:12) --22000*(1-38%) SUM(E13:613) -- 255000-36000*(1-38%) | =SUMK3:M3) = (15000-18000)*(1-38%) -38%*255000/7 =SUMK4:M4) =(15000-18000)*(1-38%) =38%*255000/7 =SUM(KS:MS) =(15000-18000)*(1-38%) -38%*255000/7 =SUM(KG:M6) =(15000-18000)*(1-38%) =38%*255000/7 =SUM/K7:M7) =(15000-18000)*(1-38%) -38%*255000/7 =SUM(K8:M8) =(15000-18000)*(1-38%) -38%*255000/7 =SUM(K9:M9) =(15000-18000)*(1-38%) -38%*255000/7 =SUM(K10:M10) =(15000-18000)*(1-38%) =SUM(K11:M11) = (15000-18000)*(1-38%) -SUM(K12:M12) (15000-18000)*(1-38%) SUM(K13:M13) 10 14 NPV NPV(8%, H4:H13)+H3 NPV -NPV(8%, N4:N13)-N3 15 NPV -NPV(8%,B4:B13)+83 16 17