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 $21 000 per year in ongoing maintenance expenses.b. Purchase a new, more advanced machine for $265 000. This machine will require $20 000 per year in ongoing maintenance expenses and will lower bottling costs by $15 000 per year. Also, $37 000will be spent up front training the new operators of the machine.Suppose the appropriate discount rate is 8% 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 alsothat 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 marginal corporate tax rate is 35%.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.

As per the given information: Rent of a bottling machine - $52,000a. Purchase price - $155,000 ;…

Answered: Beryl's Iced Tea currently rents a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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