The NVP renting the machine is $ The NVP of purchasing the current machine is $
ID: 2753033 • Letter: T
Question
The NVP renting the machine is $
The NVP of purchasing the current machine is $
The NVP of purchasing the advanced machine is $
Beryls Iced Tea currently rents a bottling machine for $50,000 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 $160,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $12,000 per year. Also, $39,000 will be spent up front to train 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 cost of the rental 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 marginal corporate tax rate is 38% Should Beryl's Iced Tea 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. The NPV of renting the current machine is S(Round to the nearest dollar.)Explanation / Answer
Calculation of NPV if rents the machine:- Initial Investment $ - Calculation of Net Cash outflow EVERY YEAR : Rent Exp $ (50,000.00) Less "Tax Saving $ 19,000.00 Cash outflow $ (31,000.00) Calculation of NPV:- Year (Cash outflow)/Inflow PVAF @7% Present value 0 $ - 1 $ - 1 $ (31,000.00) 0.9346 $ (28,972.60) 2 $ (31,000.00) 0.8734 $ (27,075.40) 3 $ (31,000.00) 0.8163 $ (25,305.30) 4 $ (31,000.00) 0.7629 $ (23,649.90) 5 $ (31,000.00) 0.713 $ (22,103.00) 6 $ (31,000.00) 0.6663 $ (20,655.30) 7 $ (31,000.00) 0.6227 $ (19,303.70) 8 $ (31,000.00) 0.582 $ (18,042.00) 9 $ (31,000.00) 0.5439 $ (16,860.90) 10 $ (31,000.00) 0.2472 $ (7,663.20) NPV $ (2,09,631.30) Net Cash outflow for rents the bottling machine Initial Investment $ (1,60,000.00) Calculation of Net Cash outflow EVERY YEAR : On going maintenance Exp $ (23,000.00) Depreciation $ (22,857.14) Less "Tax Saving (23000+16000)*38% $ 17,425.71 Net operating Value $ (28,431.43) Net Cash outflow $ (5,574.29) Calculation of NPV:- Year (Cash outflow)/Inflow PVAF @7% Present value 0 $ (1,60,000.00) 1 $ (1,60,000.00) 1 $ (5,574.29) 0.9346 $ (5,209.73) 2 $ (5,574.29) 0.8734 $ (4,868.58) 3 $ (5,574.29) 0.8163 $ (4,550.29) 4 $ (5,574.29) 0.7629 $ (4,252.62) 5 $ (5,574.29) 0.713 $ (3,974.47) 6 $ (5,574.29) 0.6663 $ (3,714.15) 7 $ (5,574.29) 0.6227 $ (3,471.11) 8 $ (5,574.29) 0.582 $ (3,244.23) 9 $ (5,574.29) 0.5439 $ (3,031.85) 10 $ (5,574.29) 0.2472 $ (1,377.96) NPV $ (1,97,694.99) Net Cash outflow if old machine purchased Initial Investment $ (3,04,000.00) Calculation of Net Cash outflow EVERY YEAR : On going maintenance Exp $ (15,000.00) Depreciation $ (43,428.57) Saving in Bottling Cost $ 12,000.00 Less "Tax Saving (15+26.5-12)*38% $ 17,642.86 Net Operating value $ (28,785.71) Net Cash outflow $ 14,642.86 Calculation of NPV:- Year (Cash outflow)/Inflow PVAF @7% Present value 0 $ (3,04,000.00) 1 $ (3,04,000.00) 1 $ 14,642.86 0.9346 $ 13,685.21 2 $ 14,642.86 0.8734 $ 12,789.07 3 $ 14,642.86 0.8163 $ 11,952.96 4 $ 14,642.86 0.7629 $ 11,171.04 5 $ 14,642.86 0.713 $ 10,440.36 6 $ 14,642.86 0.6663 $ 9,756.54 7 $ 14,642.86 0.6227 $ 9,118.11 8 $ 14,642.86 0.582 $ 8,522.14 9 $ 14,642.86 0.5439 $ 7,964.25 10 $ 14,642.86 0.2472 $ 3,619.71 NPV $ (2,04,980.61) Net Cash outflow if advanced machine purchased ** Out of three options, It would be better to purchase the existing machine only as it gives lower net cash outflow against two alternatives