quot;Capital Budgeting: Free Cash Flow, Net Present Values, and Illustration of the Depreciation Tax Shield.

"Capital Budgeting: Free Cash Flow, Net Present Values, and Illustration of the Depreciation Tax Shield. As background, please read problem 14 at the end of Chapter 7. Respond to the following case facts:Beryl’s 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 various options: (1) Continue to rent. (2) Purchase the machine it is currently renting for $150,000. This machine will require $20,000 per year in ongoing maintenance expenses. (3) Purchase a new, more advanced machine for $250,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $10,000 per year. Also, $35,000 will be spent upfront in training the new operators of the machine. Assume projected revenues from this line of business to be $75,000 currently, and anticipated growth of revenue of 2% annually. The projected revenues will be the same regardless of which alternative bottling option management chooses. Assume a discount rate of 8%. Maintenance and bottling costs are paid at the end of each year, as is the rent due on the machine.Assume that both machines will be depreciated by straight-line method with a useful life of 10 years with no residual (salvage) value. The marginal corporate tax rate is 35%.Should Beryl’s Iced Tea continue to rent, purchase its current machine, or purchase the advanced machine? Prepare a report (3-5 pages) on your conclusions. Explain your approach, underlying assumptions, and computations. Discuss the limitations of your assumptions. Present your computations. Discuss the business applications of this exercise."