Telford Engineers plc, a medium-sized manufacturer of automobile components, has decided to modernise its factory by introducing a number of robots. These will cost

£20 million and will reduce operating costs by £6 million a year for their estimated useful life of ten years starting next year (Year 10). To finance this scheme, the business can raise £20 million by issuing either

(i) 20 million ordinary shares at 100p; or

(ii) loan notes at 7 per cent interest a year with capital repayments of £3 million a year commencing at the end of Year 11.

Extracts from Telford Engineers’ financial statements appear below.

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Summary of statement of financial position as at 31 December Year 7 Year 8 m m ASSETS Non-current assets Current assets Total assets EQUITY AND LIABILITIES Equity Non-current liabilities Current liabilities Trade payables Short-term borrowings Year 6 m 48 55 103 48 30 20 5 25 103 51 67 118 80m 150p 61 30 27 27 118 65 57 122 80m 200p 61 30 25 6 Total equity and liabilities Number of issued 25p shares Share price Note that the short-term borrowings consisted entirely of bank overdrafts. 31 122 80m 100p Year 9 m 64 55 119 63 30 18 8 26 119 80m 145p