Task 1 (Capital Investment Appraisal) 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 8000 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 250 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 1400 OMR and the company does not have to worry about the maintenance of the equipment as this would be taken care by the supplier itself. Figure 1 - Diesel Generating Set a. Determine which of these two alternatives, outright purchase or leasing, would be economically beneficial for the company, if the money is valued at 12% 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? Marking Scheme: Determining the NPV of each alternative (purchasing/leasing) Discussion of reasons for selection of economical alternative Justification of reasons for purchase of equipment 20 Marks 03 Marks 02 Marks Task 1 (Capital Investment Appraisal) 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 8000 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 250 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 1400 OMR and the company does not have to worry about the maintenance of the equipment as this would be taken care by the supplier itself. Figure 1 - Diesel Generating Set a. Determine which of these two alternatives, outright purchase or leasing, would be economically beneficial for the company, if the money is valued at 12% 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? Marking Scheme: Determining the NPV of each alternative (purchasing/leasing) Discussion of reasons for selection of economical alternative Justification of reasons for purchase of equipment 20 Marks 03 Marks 02 Marks