An old photocopy machine of your company will be replaced with a new one, because it cannot be repaired. A new machine will cost $20,000. Your company can borrow funds at 12% compounded quarterly over 2 years. Alternatively, it can arrange lease finance comprising 8 payments of $3,000 starting immediately. No residual value is built into the contract. Suppose that the marginal corporate tax rate is 30% (tax payments are due quarterly with one quarter delay).

Calculate whether your company should buy or lease the photocopy machine.

Part B (8 marks)

A McDonalds Franchise expects to sell 50,000 Big Mac sandwiches annually. The special Big Mac buns can be ordered by packs only, and each pack contains 10 buns. The cost of placing an order is $50, while the storage cost is $0.50 per pack. According to their records the average daily sales of Big Mac is 137, the maximum-ever daily sales is 250, and the typical minimum sales is 50. Packs with the Big Mac buns normally arrive 10 days after the order. In the past the maximum delivery time was 20 days, and the minimum was 7 days.

Required:

Calculate the EOQ and briefly outline what it represents.

1. Calculate the reorder point, and briefly outline what it means.
2. How would the reorder point change, if the permanent safety stock is 100 packs?