Big Rock Brewery currently rents a bottling machine for $52,000 per?year, including all maintenance expenses. The company 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 $22,000 per year in ongoing maintenance expenses.
b. Purchase anew, more advanced machine for $265,000. This machine will require $16,000per year in ongoing maintenance expenses and will lower bottling costs by $10,000 per year.Also, $37,000 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 25%and there will be a negligible salvage value in ten?year's 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.)
This question was answered on: Sep 18, 2020
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