Question
Need some help with this finance question..thanks! Nigel Jones is CFO at Hammer and Smith Plc, H&S Plc. The company is having its operation just
Need some help with this finance question..thanks!
Nigel Jones is CFO at Hammer and Smith Plc, H&S Plc. The company is having its operation just outside Brighton. Hammer and Smith Plc is producing pumps for the off shore market and the requirements when it comes to durability are extremely high. It might seem odd to have such operation near London but the business started with production of pumps for the London sewers and then took the opportunity
when the oil industry developed into a major player. This morning Mrs Fox, who is heading up the R&D department, came to Nigel's office as the old stress testing equipment is in need of replacement. This is a straight forward decision but the rules at H&S Pls stipulates that any investment above 25 000 requires sign off by the CFO. The situation is as follows. Either they buy the equipment or rent it. The only certified supplier of this type of equipment is AB Test Equipment in Avesta, Sweden. The offer received is based on an economical lifetime of seven years. One option is to rent and the yearly fee is 20 000 paid in advance each year. The other option is to buy the equipment and the investment is 90 000 payable up front. If that option is chosen the equipment is possible to sell for 10 000 at the end of year seven. AB Test equipment will give a guarantee for the first two years and for year 3 and 4 repairs are expected to be 4 000 annually. For year 5 and 6 the repairs are expected at 6 000 and for year 7, 7 000. Repairs are expected to be paid at the end of each year. As this is an operational investment the required rate is set at 12%. Give Nigel some help to make a full analyse of this and propose which option is preferable.
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