BIZ201 Accounting for Decision Making Assessment 4

TASK 1

As part of the Wellness Centre Project, the plan is to build a small gym on the rooftop of the hotel. You have been appointed to help the Sales and Marketing manager to make decision whether to rent or buy specific equipment items. The required items are included in Appendix 1 together with costing information. The budget for the required equipment is $51,000 for the life of the equipment.
Regarding the buying of the equipment, the useful life is predicted to be 3 years after which replacement is needed. At the end of its useful life, it is expected to be sold for the residual value of 20% of its original cost. A servicing contract will be drawn up with a company to take care of the equipment. Servicing will add 3% to the cost each equipment. This is to be paid separately as one lump sum at the beginning of the term and will last 3 years. For the renting option, choose the one that is the most beneficial for the business. The rent is expected to rise by 10% each year. The rent is paid at the beginning of each period. Servicing of the equipment is included in the rent.

REQUIRED:
The manager would like to know whether it would be better for the Hotel to buy the required equipment or to rent it. Explore both options and make a recommendation. Take into account the time value of money at the discount rate of 7%. Include advantages and disadvantages of each option and justify your choice.