The production department of a Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. The following information is available: The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum. If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option. If it is rented, £4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines. Should the company buy or rent a new machine?
The production department of a Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. The following information is available: The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum. If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option. If it is rented, £4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines. Should the company buy or rent a new machine?
Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
Chapter26: Capital Budgeting (capbud)
Section: Chapter Questions
Problem 5R
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The production department of a Company is planning to purchase a new machine to improve product quality. The company’s
- The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum.
- If it is bought, the new machine is
depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option.
- If it is rented, £4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines.
Should the company buy or rent a new machine?
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