Question - Explain how the financial health of Clyn contractors is able to influence the decision of outright purchase using a loan today or the creation of a sinking fund for the next 4 years?

Scenario -

The construction contractor is preparing to replace the critical earthmoving plant and equipment so that they can consolidate future bids.

The anticipated cost of the digger with a maximum-sized bucket is 85,000. It needs to be bought in around 4 years time. However, an industrial development fund is willing to loan the construction contractors at a rate of 12% per annum if we can purchase the digger by the end of the week.

The contractors accountant thinks there is a possibility of outright purchase of the digger in 4 years time if the contractor can create a sinking fund at a rate of 6% per annum.

Income statement (Profit & Loss) Revenue Operating costs Amortisation of acquired intangible assets Other operating income share of post-tax results of joint venture Operating profit/(loss) Finance income Finance costs Profit/(loss) before tax Taxation Profit/(loss) for the period 2021 2020 EM EM 2,224.50 2,070.60 2,193.70 1,963.50 -7.90 -9.00 0.50 23.20 1.60 0.00 25.00 121.30 0.60 3.80 -17.20 -14.50 8.40 110.60 -22.20 -23.10 -13.80 87.50 Statement of Financial Position (Balance sheet) Assets Non-current assets Intangible assets Property, plan and equipment Investments In Joint ventures Deferred tax assets Other assets Current assets Inventories Trade and other receivables Current tax assets Cash and cash equivalent Total assets Llabilitles Current Liabilities Loans and borrowings Current tax Ilabilities Trade and other llabilities Provisions Non-current llabilities Total Liabilities Net assets Equity Number of shares Dividends Share price 2021 2020 EM EM 153.40 170.90 422.00 399.20 4.60 3.70 26.90 39.30 21.50 23.70 628.40 636.80 80.30 72.60 610.90 589.20 14.70 18.70 110.50 67.70 816.40 748.20 1,444.80 1,385.00 48.30 -19.10 -42.80 -18.60 -474.40 -10.80 -546.60 452.90 -999.50 445.30 445.30 72.00 26.30 4.96 480.50 -10.30 -558.20 -354.60 -912.80 472.20 472.20 72.00 20.80 m 9.73 million Income statement (Profit & Loss) Revenue Operating costs Amortisation of acquired intangible assets Other operating income share of post-tax results of joint venture Operating profit/(loss) Finance income Finance costs Profit/(loss) before tax Taxation Profit/(loss) for the period 2021 2020 EM EM 2,224.50 2,070.60 2,193.70 1,963.50 -7.90 -9.00 0.50 23.20 1.60 0.00 25.00 121.30 0.60 3.80 -17.20 -14.50 8.40 110.60 -22.20 -23.10 -13.80 87.50 Statement of Financial Position (Balance sheet) Assets Non-current assets Intangible assets Property, plan and equipment Investments In Joint ventures Deferred tax assets Other assets Current assets Inventories Trade and other receivables Current tax assets Cash and cash equivalent Total assets Llabilitles Current Liabilities Loans and borrowings Current tax Ilabilities Trade and other llabilities Provisions Non-current llabilities Total Liabilities Net assets Equity Number of shares Dividends Share price 2021 2020 EM EM 153.40 170.90 422.00 399.20 4.60 3.70 26.90 39.30 21.50 23.70 628.40 636.80 80.30 72.60 610.90 589.20 14.70 18.70 110.50 67.70 816.40 748.20 1,444.80 1,385.00 48.30 -19.10 -42.80 -18.60 -474.40 -10.80 -546.60 452.90 -999.50 445.30 445.30 72.00 26.30 4.96 480.50 -10.30 -558.20 -354.60 -912.80 472.20 472.20 72.00 20.80 m 9.73 million