Most of your construction work volume requires payment and p

Most of your construction work volume requires payment and performance bonds. You wish to increase your work volume (which requires acquisition of additional equipment) but your bonding agent insists that you maintain your present balance sheet cash position for working capital. Does leasing or purchasing (with a loan requiring a 10% down payment) the equipment best satisfy your bonding agent’s requirement?

Solution

There can be two cases in this problem depending upon the duration of the project on which i am working.

let the construction eqipment be of \"X\" and the duration for which it is required is for t amount of time and the lease % is of Z.

Case 1:when we are leashing the eqiupment:

a)the cash outflow will be abrupt

b)Initial Payment will be 0.1X and payment for the lease will be=X(1+(Z/100))^t

So the payment for the eqipment for the lease will be=0.1X+{X(1+(Z/100))^t}

Case 2: We are not leasing the equipment but is buy it by one time payment

a)cash outflow will be abrupt

b)Initial payment=X and the loss of the inerest if the sum of money was in the bank instead=X*R*T/200

So the total loss of money=X+(X*R*T/200)

Now, if the total cost fpr the 1st case if more than that total cost in the 2nd case,

X+(X*R*T/200)< 0.1X+{X(1+(Z/100)^t) The buying of the instrument is justified.