The production department of a Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. The following information is available:The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum.If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option.If it is rented, £4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines.Should the company buy or rent a new machine?

Definition: Decision making process: Decision making can be defined as the process of making…

Answered: The production department of a Company…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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The production department of a Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. The following information is available:

The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum.
If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and the estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 delivery cost is incurred for this purchase option.

If it is rented, £4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £500 (the delivery cost for purchase option). For the rent option, the firm is not going to sell old machines.

Should the company buy or rent a new machine?

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