Q 1. Riley Root Beer Company is considering the purchase of a new bottling machine as part of its expansion plan into other flavors of soda. Machine A costs $2,900,000 and will last for six years. Variable costs are expected to be 35% of sales and fixed costs are $170,000 per year. Machine B costs $5,100,000 and will last for nine years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. Machine B is considered to be the gold standard of bottling machines, is expected to be more reliable, and hence estimates of its cost are more certain than those of Machine A. Both machines will be depreciated on a straight line basis and are expected to have zero salvage value at the end of their useful lives. Regardless of which machine is chosen, the additional soda sales from the new flavors are expected to be $10 million per year. Riley's weighted average cost of capital is 10% and its tax rate is 35%.
a. Which machine should Riley Root Beer purchase? Support your answer with appropriate calculations.
b. Explain and defend the capital budgeting method, and any necessary adjustments to it, that you used in making your decision.
Note: The calculations to be shown in Excel. I am fine with part b. So even few line from you will be fine. CONCENTRATE ON PART A. There are no attachment files.
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