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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
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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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.)
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 $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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