Question

Thank you:

1. The NPV of renting the machine is $______

2. The NPV of Option A is $_____

3. The NPV of Option B is $_____

Beryl's Iced Tea currently rents a botting 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 $160,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for S255,000. This machine will require $19,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $37,000 will be spent upfront training 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 rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a ten-year life wiith a negligible salvage value. The corporate tax rate is 20 %. Should Beryrs 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. Note the NPV will be negative, and represents the PV of the costs of the machine in each case. The NPV of renting the machine is $ (Round to the nearest dollar Enter a negative NPV as a negative value.)

Answer 1

Rent of Bottling machine including maintenance expenses = $52,000

Maintenance Expenses of this machine = $23,000

Actual Rent of the machine = $52,000-$23,000 = $29,000

1. Net Present value of renting the machine in $ = $29,000(PVIFA_9%,10) = $186,112.07

2. The NPV of Option A

NPV is sum of Present value line (H)

it. liilit til 11. 11. 1 1 : 112! calculation of Free Cash Flows for NPV Calculation Particulars O AMARAN 11 2 3 4 5 6 7 8 9 10 Cost A $160,000 BULDA MAM L Maintenance Cost $23,000.00 $23,000.00 $23,000.00. $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 Depreciation (160000/7). $22,857.14 $22,857.14 $22,857.14 $22,857:14 $22,857.14 $22,857.14 $22,857.14 Total Expenses per year D=B+C $45,857.14 $45,857.14 $45,857.14 $45,857.14 $45,857.14 $45,857.14 $45,857.14 $23,000.00 $23,000.00 $23,000.00 Tax shield @ 20% BUR E =D*0.2 NIKE LUNAR $9.171.43 $9.171.43 $9.171.43 $9.171.43 $9.171.43 $9,171.43 $9,171.43 $4,600.00 $4,600.00 $4,600.00 Free cash flows . F=B-E $160,000.00 $13,828.57 $13,828.57 $13,828.57 $13,828.57 $13,828.57 $13,828.57 $13,828.57 $18,400.00 $18,400.00 $18,400.00 Discounting Factor @9% G E LARAN 1 0.9174 0.8417 0 7722 0.7084) 0.6499 0.5963 0.5470 0.5019 0.4604 0.4224 Present value H=F*G $160,000.00 $12,686.76 $11,639.23 $10,678.19 $9,796.51 $8,987.62 $8,245.53 $7,564.70 $9,234.34 $8,471.87 $7,772.36 41 111:111: 1 1 . ti! ! ! . Net Present Value $255,077.12

Depreciation is a non cash expense, but gives us tax shield.

2.NPV of a option B Tax shield at the end of year 1 also includes training amount. Tax is to be paid at the end of year 1 so tax shield of training cost is also discounted to calculate NPV.

TILIR !! ! ! 111 1 Calculation of Free Cash Flows for NPV Calculation Particulars 0 17 2 3 4 5 6 7 8 10 Cost $255,000 Maintenance Cost $19,000.00 $19,000.00 $19,000.00 $19,000.00 $19,000.00 $19,000.00 $19,000.00 $19,000.00 $19,000.00 $19,000.00 Training Cost $37,000 Depreciation (255000/7) $36,428.57 $36,428.57 $36,428.57 $36,428.57 $36,428.57 $36,428.57 $36,428.57 $36,428.57 Bottling Cost -$11,000.00 $11,000.00 $11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 $11,000.00 $11,000.00 $11,000.00 $11,000.00 Total Expenses per year $37, dojd.00 $44,428.57 $44,428.57 $44,428.57 $44,428.57 $44,428.57 $44,428.57 $44,428.57 $44,428.57 $8,000.00 $8,000.00 Tax shield @ 20% G=F*0.20 $16,285.71 $8,885.71 $8,885.71 $8,885.71 $8,885.71 $8,885.71 $8,885.71 $8,885.71 $1,600.00 $1,600.00 Free cash flows H=A+B+C+E-G $292,000.00 $8,285.71 -$88571 -9885.71 $885.71 $885.71 -$885.71 $885.71 $885.71 $6,400.00 $6,400.00 Discounting Factor @9% 0.91740.8417 0.7722 0.7084 0.6499 0.5963 0.5470 0.5019 0.4604 0.4224 Present value H=F*G $292,000.00 -$7,601.57 -$745.49 $683.93 -$627.46 $575.65 1-$528.12 -$484.52 -$444.51 $2,946.74 $2,703.43 31 2 F ! !!1111111 SHIT ll! Tiitit Net Present Value $285,958.91