Beryl’s Iced Tea has three options among which a choice has to be made. These are as follows: BIT currently rents a bottling machine for $50,000 per year including all maintenance expenses. It can buy the machine it rents at present for $150,000. Additionally, the machine will require maintenance expenses of $20,000 per year. The machine will be depreciated on a straight line basis over a seven-year period, though it will last for ten years. There will be negligible salvage value. BIT can buy an advanced machine for $285,000. This will require an ongoing maintenance of $15,000 per year. It will also reduce bottling costs by $10,000 per year. The machine operators need to be trained in the beginning which will cost $35,000 initially. This machine will be depreciated over a period of seven years and they have a ten year life. At the end of ten years, there is no salvage value of the machine. The marginal corporate income tax rate is 35%. The appropriate discount rate is 8% per year. To determine: The best option among the above three options

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Chapter 8, Problem 14P

Summary Introduction

Beryl’s Iced Tea has three options among which a choice has to be made. These are as follows:

BIT currently rents a bottling machine for $50,000 per year including all maintenance expenses.

It can buy the machine it rents at present for $150,000. Additionally, the machine will require maintenance expenses of $20,000 per year. The machine will be depreciated on a straight line basis over a seven-year period, though it will last for ten years. There will be negligible salvage value.

BIT can buy an advanced machine for $285,000. This will require an ongoing maintenance of $15,000 per year. It will also reduce bottling costs by $10,000 per year. The machine operators need to be trained in the beginning which will cost $35,000 initially. This machine will be depreciated over a period of seven years and they have a ten year life. At the end of ten years, there is no salvage value of the machine.

The marginal corporate income tax rate is 35%. The appropriate discount rate is 8% per year.

To determine: The best option among the above three options

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