Question

Q-Search in Document . 2+ Share DOO A - Home Insert Design Layout O A T = Margins Orientation Size Columns Breaks References Mailings Review Indent Line Numbers Left: 0 be Hyphenation Right: 0 Documento View Acrobat Picture Format Spacing % Before: Opt ; Position Wrap * After: Op! : Text Bring Send Forward Backward Selection Pane Align Group Rotate 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 $165,000. This machine will require $21,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $255,000. This machine will require $20,000 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 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 $ . (Round to the nearest dollar. Enter a negative NPV as a negative value.) Page 1 of 1 O words English (United States) E E - + 195%

Answer 1

NPV of renting the machine is -$277,243.81 (Note 1) NPV of Purchase of Current Machine is -$249,089.85 (Note 2) NPV of Purchase of Advanced Machine is - $299,538.48 (Note 3) NPV of Purchase machine is less than other alternatives. Hence company should purchase the current machine Note 1: Calculation of NPV of renting the current Machine Particulars Rental Expenses (A) Less: Tax Benefit@ 20% (B=A*20%) Rent Expenses after tax (C = A-B) Discount Factor@9% (D) 1/(1+9%)^n n=1,2,3,4,5,6,7,8,9,10 Discounted Cash Flows (E=C*D) NPV of renting the current machine -54000 -10800 -43200 54000 - 10800 -43200 3 54000 - 10800 -43200 4 54000 -10800 -43200 5 54000 -10800 -43200 6 54000 -10800 -43200 7 54000 - 10800 -43200 8 54000 -10800 -43200 54000 -10800 -43200 10 54000 -10800 -43200 0.917431 0.84168 0.77218 0.70842 0.649931 0.596267 0.547034 0.501866 0.460428 0.422411 -30604 -28077 -25758.7 -23631.9 -21680.6 -19890.5 -18248.1 -39633 -36360.6 -33358.3 -277243

Note 2: Calculation of NPV of the purchase of current Machine Particulars 0 Initial Investment Purchase of machine (A) - 165000 -21000 21000 -21000 -21000 -21000 -21000 -21000 21000 -21000 21000 -23571.4 -23571.4 -23571.4 -23571.4 -23571.4 -23571.4 -23571.4 Operating Cash Flows Ongoing maintenance expenses (B) Depreciation (C) ($165000 / 7 years) Total Expenses before tax (D = B+C) Tax Benefit @20% (E=D*20%) Total Expenses after tax (F= D-E) Add back Depreciation (G=-C) Net Expenses after tax (H = F+G) Total Cash Flows (I = A+H) Discount Factor@9% (1) 1/(1+9%)^n n=0,1,2,3,4,5,6,7,8,9,10 21000 -4200 -16800 -44571.4 -44571.4 -44571.4 -44571.4 -44571.4 -44571.4 -44571.4 -8914.29 -8914.29 -8914.29 -8914.29 -8914.29 -8914.29 -35657.1 -35657.1 -35657.1 -35657.1 -35657.1 -35657.1 -35657.1 | 23571.43 23571.43 23571.43 23571.43| 23571.43| 23571.43 23571.43 -12085.7 -12085.7 -12085.7 -12085.7 -12085.7 -12085.7 -12085.7 -165000 -12085.7 -12085.7 -12085.7 -12085.7 -12085.7 -12085.7 -12085.7 -21000 -42001 -16800 0 -16800 -16800 21000 - 4200 -16800 0 -16800 -16800 -16800 -16800 1 0.917431 0.841679 0.77218 0.70842 0.64993 0.596267 0.547034 0.501866 0.460428 0.422411 -10172.3 -9332.39 -8561.82 -7854.88 -7206.31 -6611.3 -8431.35 -7735.19 -7096.5 -1650001 -11087.8 -249089.85 NPV of purchase of the current machine

Note 3: Calculation of NPV of the purchase of advanced Machine Particulars Initial Investment Purchase of machine -255000 Training of operator -35000 Net Investment (A) -290000 11000 11000 11000 11000 11000 11000 11000 -20000 20000 20000 - 20000 20000 -20000 - 20000 -36428.6 -36428.6 -36428.6 -36428.6 -36428.6 -36428.6 -36428.6 11000 - 20000 11000 20000 11000 - 20000 Operating Cash Flows Reduction In Bottling Costs (B) Ongoing maintenance expenses (C) Depreciation (D) ($255000 / 7 years) Profit Before tax (D = B+C) Tax Benefit @ 20% (E = D*20%) Profit after tax (F = D-E) Add back Depreciation (G=-C) Net Expenses after tax (H = F+G) -45428.6 -45428.61 -45428.6 -45428.6 -45428.6| -45428.6 -45428.6| -9085.71| -9085.71| -9085.71| -9085.71 -9085.71-9085.71| -9085.71 -36342.9 -36342.9-36342.9 -36342.9-36342.9 -36342.9-36342.91 36428.6 36428.6 36428.6 36428.6 36428.6 36428.6 36428.6 85.7143 85.7143 85.7143 85.7143 85.7143 85.7143 85.7143 -9000 -18001 -7200 -9000 - 1800| -7200 -90001 -1800 -7200 -7200 -7200 -72001 -290000 85.7143 85.7143 85.7143 85.7143 85.7143 85.7143 85.7143 -7200 -7200 -7200 1 0.91743 0.84168 0.77218 0.70843 0.64993 0.59627 0.54703 0.50187 0.46043 0.42241 Total Cash Flows (I = A+H) Discount Factor@9% (1) 1/(1+9%)^n n=0,1,2,3,4,5,6,7,8,9,10 Discounted Cash Flows (E = C*D) NPV of purchase of the advanced machine 72.144 66.1872 60.7222 55.7084 51.1086 46.8887| -3613.44-3315.08-3041.36 -2900001 78.637| | -299538.48