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 $25,000 per year in ongoing maintenance expenses, or option b, which is to purchase a new, more advanced machine for $250,000, which will require $20,000 per year in ongoing maintenance expenses and will lower bottling costs by $13,000 per year. Also, $38,000 will be spent upfront in 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 are subject to a CCA rate of 25% and there will be a negligible salvage value in 10 years' time (the end of each machine's life). The marginal corporate tax rate is 38%. Should Big Rock Brewery 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 (rent the machine) is $ - 198947. (Round to the nearest dollar.) The NPV (purchase the current machine) is S (Round to the nearest dollar.)
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 $25,000 per year in ongoing maintenance expenses, or option b, which is to purchase a new, more advanced machine for $250,000, which will require $20,000 per year in ongoing maintenance expenses and will lower bottling costs by $13,000 per year. Also, $38,000 will be spent upfront in 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 are subject to a CCA rate of 25% and there will be a negligible salvage value in 10 years' time (the end of each machine's life). The marginal corporate tax rate is 38%. Should Big Rock Brewery 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 (rent the machine) is $ - 198947. (Round to the nearest dollar.) The NPV (purchase the current machine) is S (Round to the nearest dollar.)
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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Transcribed Image Text: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 $25,000 per year in ongoing maintenance expenses, or option b, which is to purchase a new, more advanced machine for
$250,000, which will require $20,000 per year in ongoing maintenance expenses and will lower bottling costs by $13,000 per year. Also, $38,000 will be spent upfront in 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 are subject to a CCA rate of 25% and there will be a negligible salvage value in 10 years' time (the end of each machine's life). The marginal corporate tax rate is 38%. Should Big Rock Brewery
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 (rent the machine) is $ - 198947. (Round to the nearest dollar.)
The NPV (purchase the current machine) is $
(Round to the nearest dollar.)
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