Question

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Beryl's Iced Tea currently rents a bottling machine for $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 $155,000. This machine will require $25,000 per year in ongoing maintenance expenses b. Purchase a new, more advanced machine for $265,000. This machine will require $18,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, 339,000 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 with a negligible salvage value. The corporate tax rate is 20%, 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 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 $ -277243 (Round to the nearest dollar. Enter a negative NPV as a negative value.) The NPV of option Ass (Round to the nearest dollar. Enter a negative NPV as a negative value.)

Answer 1

as such here only NPV of option A has been asked but I have calculated the same for both to be more helpful to student.

thanks for posting...
A B C E 3 4 Option A Option B VALUE 155000 265000 6 25000/year 18000/year 11000/year maintainance 7 savings 0 training exp Net exp 39000 7000/Year 25000/Year 10 Total investment 155000 304000 11 TAX RATE 20% 12 Discount rate 9% 13 LIFE(in years) 7 10 14 Depriciation 22142.85714 26500 15 16 17 intial investment 155000 265000 18 $25,000.00 7000 19 per year maint. 22142.85714 26500 Depriciation 20 Dep. tax benifit Net exp 4428.571429 5300 21 $20,571.43 1700 22 PV of exp. $103,535.03 $10,910.02 23 ($258,535.03) ($275,910.02) NPV 24 25

Formulas used

Depriciation :- =C6/C14

Depriciation tax benefit :- =C20*0.2

Net exp. :- =C19-C21

PV of expenses:- =-PV(0.09,7,C22,0,0)

NPV :- =-(C18+C23)

Conclusion

Option A should be choose as it has less present value of expenses.