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The NPV of renting the machine is $ (Round to the nearest dollar. Enter a negative NPV as a negative value.)

The NPV of renting the machine is $ (Round to the nearest dollar. Enter a negative NPV as a negative value.)

Essentials Of Investments
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 $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 $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $35,000 will be spent upfront training 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 rental of the 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 corporate tax rate is 30%. Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? Note: To make this decision, calculate the NPV of the FCF associated with each alternative. The NPV will be negative, and represents the PV of the costs of the machine in each case. The NPV of renting the machine is $ (Round to the nearest dollar. Enter a negative NPV as a negative value.)
Transcribed Image Text: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 $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $35,000 will be spent upfront training 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 rental of the 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 corporate tax rate is 30%. Should Beryl's Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? Note: To make this decision, calculate the NPV of the FCF associated with each alternative. The NPV will be negative, and represents the PV of the costs of the machine in each case. The NPV of renting the machine is $ (Round to the nearest dollar. Enter a negative NPV as a negative value.)
Expert Solution
Step 1: Introduction

Net Present Value (NPV) is a financial concept widely used in investment analysis and capital budgeting to assess the profitability and desirability of an investment or project. 

It takes into account the time value of money, which recognizes that the value of money today is worth more than the same amount in the future due to factors like inflation and the opportunity cost of capital. 

NPV helps individuals and businesses make informed decisions about investments by considering the potential returns and costs in present value terms.

Net Present Value is a fundamental financial tool that allows individuals and businesses to evaluate the financial viability of investments by comparing the present value of cash inflows and outflows.

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