Beryl's Iced Tea currently rents a bottling machine for $55,000 per year, including all maintenance expenses. It isconsidering purchasing a machine instead and is comparing two options:a. Purchase the machine it is currently renting for $160,000. This machine will require $20,000 per year in ongoingmaintenance expenses.b. Purchase a new, more advanced machine for $260,000. This machine will require $17,000 per year in ongoingmaintenance expenses and will lower bottling costs by $13,000 per year. Also, $40,000 will be spent up front to trainthe new operators of the machine.Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottlingcosts are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will bedepreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvagevalue. The marginal corporate tax rate is 25%.Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? To makethis decision, calculate the NPV of the FCF associated with each alternative.The NPV of renting the current machine is $ -289723. (Round to the nearest dollar.)The NPV of purchasing the current machine is $ -(Round to the nearest dollar.)

The company has 3 options , one it can continue to rent the machine, second it can purchase the…

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

See similar textbooks

Similar questions

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need nine SALs, and each SAL costs $3,250 and requires $300 of maintenance each year. At the end of the computer’s eight-year life, each one could be sold for $195. Alternatively, the company could buy seven HALs. Each HAL costs $3,600 and requires $355 of maintenance every year. Each HAL lasts for six years and has a resale value of $140 at the end of its economic life. The company will continue to purchase the model that it chooses today into perpetuity, and the tax rate is 25 percent. Assume that the maintenance costs occur at year-end. Depreciation is straight-line to zero. What is the EAC of each model if the appropriate discount rate is 12 percent? (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $46,000 and a remaining useful life of five years. It can be sold now for $56,000. Variable manufacturing costs are $44,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 116,000 $ 129,000 Variable manufacturing costs per year 21,000 13,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase?
Whispering Winds Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,525. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,500. At the end of eight years, the company will sell the truck for an estimated $27,600. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. William Davis, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%. (a) Calculate the cash payback period and net present value of the proposed investment. (If the net present value is negative, use either a…
The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates. The dipping operation currently is done largely by hand. The machine the company is considering costs $190,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $11,100, including installation. After five years, the machine could be sold for $8,000. The company estimates that the cost to operate the machine will be $9,100 per year. The present method of dipping chocolates costs $51,000 per year. In addition to reducing costs, the new machine will increase production by 7,000 boxes of chocolates per year. The company realizes a contribution margin of $1.55 per box. A 21% rate of return is required on all investments. Required: 1. What are the annual net cash inflows that will be provided by the new dipping machine? 2. Compute the new machine’s net…
Dobbs Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $55,981. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,900. At the end of eight years, the company will sell the truck for an estimated $28,400. Traditionally, the company has used a general rule that it should not accept a proposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Pavel Chepelev, a new manager, has suggested that the company should not rely only on the payback approach but should also use the net present value method when evaluating new projects. The company's cost of capital is 8%. 1. Calculate the cash payback period and net present value of the proposed investment.
The Sweetwater Candy Company would like to buy a new machine that would automatically "dip" chocolates. The dipping operation is currently done largely by hand. The machine the company is considering costs $240,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $11,600, including installation. After five years, the machine could be sold for $5,000. The company estimates that the cost to operate the machine will be $9,600 per year. The present method of dipping chocolates costs $56,000 per year. In addition to reducing costs, the new machine will increase production by 3,000 boxes of chocolates per year. The company realizes a contribution margin of $1.80 per box. A 13% rate of return is required on all investments. Use Excel or spreadsheet to solve. Round answers to the nearest dollar. Required: 1. What are the annual net cash inflows that will be…
Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two alternate options: option a is to purchase the machine it is currently renting for $165,000, which will require $24,000 per year in ongoing maintenance expenses, or option b, which is to purchase a new, more advanced machine for $260,000, which will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $10,000 per year. Also, $36,000 will be spent upfront in training the new operators of the machine. Suppose the appropriate discount rate is 7% 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 are subject to a CCA rate of 30% and there will be a negligible salvage value in 10 years' time (the end of each machine's life). The marginal corporate tax…
Lopez Company is considering replacing one of its old manufacturing machines. The old machine has a book value of $49,000 and a remaining useful life of five years. It can be sold now for $59,000. Variable manufacturing costs are $44,000 per year for this old machine. Information on two alternative replacement machines follows. The expected useful life of each replacement machine is five years. Machine A Machine B Purchase price $ 122,000 $ 136,000 Variable manufacturing costs per year 18,000 15,000 (a) Compute the income increase or decrease from replacing the old machine with Machine A. (b) Compute the income increase or decrease from replacing the old machine with Machine B. (c) Should Lopez keep or replace its old machine? (d) If the machine should be replaced, which new machine should Lopez purchase?
The Sweetwater Candy Company would like to buy a new machine that would automatically “dip” chocolates. The dipping operation currently is done largely by hand. The machine the company is considering costs $180,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $11,000, including installation. After five years, the machine could be sold for $7,000. The company estimates that the cost to operate the machine will be $9,000 per year. The present method of dipping chocolates costs $50,000 per year. In addition to reducing costs, the new machine will increase production by 6,000 boxes of chocolates per year. The company realizes a contribution margin of $1.50 per box. A 18% rate of return is required on all investments. view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What are the annual…
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 $160,000. This machine will require $24,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265,000. This machine will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $13,000 per year. Also, $37,000 will be spent up front to train 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 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 30%. Should Beryl's Iced…
Arrowroot Ltd is considering whether to invest in a machine that produces soft drink bottles now or in one year’s time. The machine costs $2 million and the bottles will be ready for sale immediately after the machine is purchased. The machine is expected to produce 1 million bottles per year forever. Currently, the bottle can be sold for $0.4 each but next year the price will change. If there is a high demand, the price for one bottle will be $0.6. If the demand is normal, the price will be $0.3 per bottle. If the demand is low, the price will be $0.1 per bottle. The probability of high demand is 0.3, the probability of normal demand is 0.2 and the probability of low demand is 0.5. The price will remain at this new level forever. Assume no taxes and the company’s cost of capital is 10 percent per annum. Should the company invest in the machine now or delay it by one year? Show all calculations. What is the value of the option to delay?
Alfa bakery is considering replacing its existing automated oven. The current market value of the oven is $14,600. The value of the oven depreciates by 27% per year. The bakery requires $17,100 in maintenance costs per year as of today. The maintenance costs are expected to increase by $5,300 per year as the oven gets older. If the MARR is 11.8% and the production is 34 cakes per day; should Alfa bakery instead replace it by outsource their automated baking production to an external bakery for $2.20 per cake?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS