A-Jay is a family run bag manufacturing business operating for last 40 years. The current Chief Operating Office, Anthony Jay Jr, recognizes that the factory’s Plant and Equipment is in need of updating and has received a quotation of £450,000 to modernize the factory. When fully operational, the new Plant and Equipment will significantly increase output. 

Anthony is considering one of the following two options: 

I. Lease the equipment from the suppliers. The cost of the lease is broken down as follows 

a. A non-refundable deposit of £70,000 payable in September 2023. 

b. Annual lease is £72,000 (payable monthly), this includes full maintenance of the Plant and Equipment and training for the staff. This payment is expected to start in September 2023. 

c. The lease is for 10 years. 

d. A-Jay will have the option to renew the lease at the end of 10 years for a new Plant and Equipment with no further deposit. 

II. Borrow the £450,000 from the bank. 

a. Interest rate 5% for 10 years. 

b. Equipment maintenance and staff training will cost £18,000 annually. 

c. Installation is expected to start in September 2023. A-Jay is expected to pay £100,000 initial fees to the installation company in September 2023, a further £100,000 in December 2023 and the Balance in June 2024 – the expected completion of the project.

Prepare two cash budgets: 

If a loan is taken for the period ending December 2023 

If a lease is taken for the same period. Also made the lease calculationa for period from September 2023 to December 2023.

Answer rating: 100% (QA)

Cash Budget Loan Option Period ending December 2023 September 2023 Initial fees to installation comp... View the full answer