BioChem Company, a pharmaceutical manufacturing unit, cannot afford to have any power outage as this would lead to loss of time and production shortages. While preparing their annual budget they have allocated 7000 OMR for the purchase of a high power diesel generator set. Owning the generator would demand proper maintenance of the generator also, which would cost the company 225 OMR in the first year. Subsequently, the maintenance charges will increase at the rate of 10% every year due to wear and tear of the moving parts. Moreover, there will be no demand for second-hand generators in the market and the company does not get any resale value for the generator if they wish to sell it at any point of time. Alternatively, a Diesel Generator could be arranged on lease from an equipment supplier for an annual lease amount of 1300 OMR and the company does not have to worry about the maintenance of the equipment as this would be taken care of by the supplier itself.

a. Determine which of these two alternatives, outright purchase or leasing, would be economically beneficial for the company, if the money is valued at 10% per year. The company plans to use the generator for 8 years.

b. However, if the company policy wishes to purchase the equipment what factors do the company has to consider to justify their decision, even if the decision is not economical?