tead and is comparing two alternate options: option a is to purchase the machine it is currently renting for $165,000, which will require $22,000 p intenance expenses, or option b, which is to purchase a new, more advanced machine for $250,000, which will require $19,000 per year in ongo penses and will lower botting costs by $11,000 per year. Also, $40,000 will be spent upfront in training the new operators of the machine. Suppom scount 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 c sume 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 mas arginal corporate tax rate is 30% Should Big Rock Brewery continue to rent, purchase its current machine, or purchase the advanced machine? T ecision, 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 i use.) me NPV (rent the machine) is $-253,641 (Round to the nearest dollar) NOV
tead and is comparing two alternate options: option a is to purchase the machine it is currently renting for $165,000, which will require $22,000 p intenance expenses, or option b, which is to purchase a new, more advanced machine for $250,000, which will require $19,000 per year in ongo penses and will lower botting costs by $11,000 per year. Also, $40,000 will be spent upfront in training the new operators of the machine. Suppom scount 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 c sume 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 mas arginal corporate tax rate is 30% Should Big Rock Brewery continue to rent, purchase its current machine, or purchase the advanced machine? T ecision, 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 i use.) me NPV (rent the machine) is $-253,641 (Round to the nearest dollar) NOV
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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Give typing answer with explanation and conclusion
Transcribed Image Text:Big Rock Brewery currently rents a bottling machine for $54,000 per year, including all maintenance expenses. The company is considering purchasing a machine
K
instead and is comparing two alternate options: option a is to purchase the machine it is currently renting for $165,000, which will require $22,000 per year in ongoing
maintenance expenses, or option b, which is to purchase a new, more advanced machine for $250,000, which will require $19,000 per year in ongoing maintenance
expenses and will lower bottling costs by $11,000 per year. Also, $40,000 will be spent upfront in 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 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 30%. 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 $-253,641 (Round to the nearest dollar)
The NPV (purchase the current machine) is $-232.224 (Round to the nearest dollar)
The NPV (purchase the advanced machine) is $(Round to the nearest dollar)
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