(Answered) Moulding machines for its production department

Management Studies

A company requires three moulding machines for its production department. the management are considering two financing options, listed below.

Option 1: Obtain a bank loan on 1 July 2014 and buy the machine in the market. the loan contract specifies that the company would pay $ 30000 per annum at the end of each year for the next four years.

Option 2: Enter into an arrangement to lease three machines from a dealer for four years starting on 1 July, 2014. According to the arrangement, the company would pay $20000 immediately, i.e on July 1, 2014 and subsequently pay 20000 at 1 July 2015, 2016 and 2017. Furthermore, the company guarantees to pay 5000 at the end of the lease term.

Assume that the market interest rate of 10%. Discuss the feasibility of option 1 and option 2 using annuity principle. Discuss any 2 non-financial factors which can impact your decision.

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Operation Management, Management Studies

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