Beryl's Iced Tea currently rents a bottling machine for $55,000 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 $255,000. This machine will require $18,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also,$39,000 will be spent up front to train 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 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 rateis 25%.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.

Net Present Value is used to evaluate the investment and financing decisions that involve cash flows…

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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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 $160,000. This machine will require $20,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265,000. This machine will require $17,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $35,000 will be spent up front to train 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 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 25%. The NPV of renting…
Amazon is considering using high capacity drones that would make its product deliveries more efficient. For this project, $113,000 would need to be spent right away to buy the required fleet of drones. The drones will be losing their economic value in equal amount each year, fully over their 5-year economic lives. Once the drones' economic life is over, they would all be sold for $8,500 selling price to a new owner, and Amazon would then immediately purchase the same but brand-new drones for the same price as what it paid for the initial fleet of drones. When those drones' life is over, they would again be sold and, again, brand-new ones would be purchased - all for the same prices as for the initial drones, and so on, over and over. Additional information: • Amazon expects $9,200 in annual operating costs. • All future cash flows are year-end cash flows. ● Amazon pays 25 percent tax rate on all taxable income. Amazon requires an annual discount rate of 9 percent, and the rate is not…
Beryl's Iced Tea currently rents a bottling machine for $51,000 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 $150,000. This machine will require $25,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $255,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $15,000 per year. Also, $35,000 will be spent upfront 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 also that the machines will be depreciated via the straight-line method over 7 years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 28%. Should Beryl's Iced Tea continue to…
Sheffield 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 $57,270. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,300. At the end of eight years, the company will sell the truck for an estimated $28,200. 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. Chris Jackson, 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 negative…
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,654.00 to install, $5,060.00 to operate per year for 7 years at which time it will be sold for $7,020.00. The second, RayCool 8, costs $41,774.00 to install, $2,009.00 to operate per year for 5 years at which time it will be sold for $9,022.00. The firm’s cost of capital is 6.27%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.
Managers of Central Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $100,000 and is expected to last five years. The second machine costs $160,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. Which machine should Central Embroidery purchase?
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $195,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.77 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $590,000. Finally, the project requires an immediate investment in working capital of $445,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…
Linkin 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 $55,440. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,400. At the end of 8 years, the company will sell the truck for an estimated $28,200. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.(a) Compute the cash payback period and the net present value of the proposed investment. Cash payback period 6.6 years Net present value $
ClockWatchers is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The company must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortisation expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortisation expenses of $500. If EBIT Break-even is how the company evaluates its projects, then above what level of expected sales should ClockWatchers choose the high fixed cost alternative? 60 units 90 units120 units 180 units
A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,729.00 to install, $5,020.00 to operate per year for 7 years at which time it will be sold for $6,912.00. The second, RayCool 8, costs $41,419.00 to install, $2,021.00 to operate per year for 5 years at which time it will be sold for $8,947.00. The firm’s cost of capital is 5.34%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

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