JCU Ltd is a manufacturing company. Mark Tan is the recently promoted investment Manager. Mark Tan...

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JCU Ltd is a manufacturing company. Mark Tan is the recently promoted investment Manager. Mark Tan is faced by a Dilemma. One of the machines on the production line has broken down. After extensive testing the engineers have determined that the machine is beyond repair and will need to be replaced. JCU operates a JIT purchasing and manufacturing policy. Mark Tan will therefore need to replace the machine as soon as possible. He estimates that the new machine will be kept for three years and is unsure whether it would be beneficial for the company to buy or lease the new machine. He has provided you with the following information. 1) The machine can be leased for three annual payments of $300,000, payable at the end of each of years 1 to 3. 2) Alterative the machine can be brought for $625,000 and will have an expected scrap value of $10,000 in three years' time. Annual maintenance costs are expected to be $37,500. JCU can claim depreciation/capital allowance on a 25% reducing balance basis. The Company is profitable and pays rax on profits at an annual rate of 19%, one year in arrears. JCU has an after-tax borrowing rate of 10% pa (i.e., cost of capital). JCU Ltd is a manufacturing company. Mark Tan is the recently promoted investment Manager. Mark Tan is faced by a Dilemma. One of the machines on the production line has broken down. After extensive testing the engineers have determined that the machine is beyond repair and will need to be replaced. JCU operates a JIT purchasing and manufacturing policy. Mark Tan will therefore need to replace the machine as soon as possible. He estimates that the new machine will be kept for three years and is unsure whether it would be beneficial for the company to buy or lease the new machine. He has provided you with the following information. 1) The machine can be leased for three annual payments of $300,000, payable at the end of each of years 1 to 3. 2) Alterative the machine can be brought for $625,000 and will have an expected scrap value of $10,000 in three years' time. Annual maintenance costs are expected to be $37,500. JCU can claim depreciation/capital allowance on a 25% reducing balance basis. The Company is profitable and pays rax on profits at an annual rate of 19%, one year in arrears. JCU has an after-tax borrowing rate of 10% pa (i.e., cost of capital).

Answer rating: 100% (QA)

To analyze whether it would be more beneficial for JCU Ltd to buy or lease the new machine we can compare the costs and financial implications of both ... View the full answer