Q1) Beryl's Iced Tea presently rents bottling machine for $50,000 per year, including all maintenance expenses. It is thinking of buying a machine instead, and is comparing two options:
a) Purchase machine it is presently renting for $150,000. This machine will need $20,000 per year in ongoing maintenance expenses.
b) Purchase a new, more advanced machine for $250,000. This machine will need $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $10,000 per year. Also, $35,000 will be spent up front in training new operators of machine.
Assume the suitable discount rate is 8% per year and machine is bought today. Maintenance and bottling costs are paid at the end of each year, as is rental of the machine. Suppose also that machines will be depreciated via straight-line method over seven years and that they have ten-year life with negligible salvage value. Marginal corporate tax rate is 35%. Should Beryl's Iced Tea continue to rent, purchase its present machine, or purchase advanced machine?