The company ABC Rental is dedicated to the sale and rental of construction equipment and tools in general. It was founded in 2015 by the Gonzlez brothers who have managed the business efficiently, achieving constant growth of over 20% per year in their sales. In 2021 they hired a Finance Manager (CFO) to help them with the company's finances and make projections so that they could manage the company's growth and evaluate growth opportunities. Recently the owners were presented with an opportunity to buy the opportunities of a competing company which would give them the opportunity to add over 50 new customers and continue to increase their sales. To be able to carry out this transaction they would need $ 200,000, because the cost of the transaction would be $ 100,000, plus $ 75,000 in improvements to their facilities that include expanding the warehouse and offices, plus $ 25,000 to optimize inventory systems and some miscellaneous expenses. The company has $50,000 in retained earnings, deposited in an emergency account that generates 1% annual interest, which represents about $500 annually and the owners have $100,000 in personal savings that generate 2% per year which represents about $2,000 per year. They have doubts whether they use the retained earnings and their savings to absorb most of the cost of the transaction or finance it through a long-term loan offered by a bank at 7% per year. For this reason, they go to the CFO to analyze the transaction and give them recommendations of what the alternative would be. He evaluated the data, met with several financial institutions and presented them with the following alternatives: 1- Use the $ 150,000 they have saved and finance the balance of $ 50,000, using a line of credit of $ 100,000 that they already have active in the bank and that only owe $ 10,000 at the moment because they use it only for purchase of inventory when necessary. This line has an annual interest cost of 10% of the amount used. 2- Finance the $200,000 to 10 years through a loan at 7% per year and keep all savings for emergencies. 3- Use only the retained earnings for the transaction ($50,000) and finance $150,000 to 10 years at 7% per year and keep personal savings.

If you were the CFO, which of the three alternatives would you recommend and why? What criteria do I use to make your recommendation? Could you also present a fourth alternative that would also be viable?

Answer rating: 100% (QA)

As the CFO I would evaluate each alternative based on financial considerations and the overall wellbeing of ABC Rental Heres an analysis of the three ... View the full answer