Big Rock Brewery currently rents a bottling machine for
$54,000
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
$165,000.
This machine will require
$21,000
per year in ongoing maintenance expenses.
b. Purchase a​ new, more advanced machine for
$265,000.
This machine will require
$19,000
per year in ongoing maintenance expenses and will lower bottling costs by
$14,000
per year.​ Also,
$38,000
will be spent upfront in training the new operators of the machine.
Suppose the appropriate discount rate is
7%
per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each​ year, as is the rental of the machine. Assume also that the machines are subject to a CCA rate of
45%
and there will be a negligible salvage value in ten​ year's time​ (the end of each​ machine's life). The marginal corporate tax rate is
40%.
Should Big Rock Brewery continue to​ rent, purchase its current​ machine, or purchase the advanced​ machine?
The NPV​ (rent the​ machine) is
​$enter your response here.
​(Round to th