1. Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The company is considering purchasing a machineinstead and is comparing two alternate options: option a is to purchase the machine it is currently renting for $150,000, which will require $24,000 per year in ongoingmaintenance expenses, or option b, which is to purchase a new, more advanced machine for $255,000, which will require $16,000 per year in ongoing maintenanceexpenses and will lower bottling costs by $11,000 per year. Also, $38,000 will be spent upfront in training the new operators of the machine. Suppose the appropriatediscount 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 45% and there will be a negligible salvage value in 10 years' time (the end of each machine's life). Themarginal corporate tax rate is 35%. Should Big Rock Brewery continue to rent, purchase its current machine, or purchase the advanced machine? To make thisdecision, 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 eachcase.)The NPV (rent the machine) is S. (Round to the nearest dollar.)

NPV (Net Present Value) refers to the concept which evaluates the difference between the current…

Is comparing two nce expenses, or option b, which is to purcha and will lower bottling costs by $11,000 per ate is 9% per year and the machine is purcha Iso that the machines are subject to a CCAr corporate tax rate is 35%. Should Big Rock B options. option calculate the NPV of the ECE associated with

Is comparing two nce expenses, or option b, which is to purcha and will lower bottling costs by $11,000 per ate is 9% per year and the machine is purcha Iso that the machines are subject to a CCAr corporate tax rate is 35%. Should Big Rock B options. option calculate the NPV of the ECE associated with

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Capital Gain

Any capital asset when sold can give the seller a higher or lower price from its purchase price leading to a capital gain or capital loss. The time period of holding an asset is decided based on if it is a long term or short-term capital gain. On that basis, the rate of taxation is decided if it is 20%, 15% or according to the tax brackets. The rate of taxation differs in the case of equity or debt, whether long or short term. The capital gain can be adjusted from capital loss to arrive at a net capital gain. The amount of gains and the exemption has to be reported in the tax return filed in the financial year in which the asset was transferred. The tax return can be filed quarterly, monthly, semi-annually or annually.

Question

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 $150,000, which will require $24,000 per year in ongoing
maintenance expenses, or option b, which is to purchase a new, more advanced machine for $255,000, which will require $16,000 per year in ongoing maintenance
expenses and will lower bottling costs by $11,000 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 45% 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 35%. 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 S. (Round to the nearest dollar.)

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