Case Study Mead Meals on Wheels
The process of acquiring equipment by the Mead Meals on Wheels (MMWC) is a huge financial choice that can have an adverse effect in the operation of the company. The machine has a total cost of $ 700, 000 with a five years life span and the executive director. Therefore, there are key factors that the firm should consider before buying the machinery. The company should consider the finance, tax implications, growth plans and usage, time, and running costs. This paper will explore and present an endorsement backing the type of financial influence the development of facilities will have on MMWC.
MMWC may choose to purchase machinery or equipment to have its full ownership. However, the decision may affect their cash flows rendering the company incapable of performing other functions such as paying of employees. According to Finkler, Steven A. et al. (2013), the company can take a bank loan or enroll in an asset finance program if it seeks to purchase the equipment. The merit of purchasing the items is to have ownership, it also act to reduce taxes, and there is possibility of deduction through depreciation. The disadvantage of the method is that there is a higher initial expenses and the company is stuck with old equipment after it becomes obsolescence.
Nevertheless, it can lease the asset so as to preserve capital and offer flexibility. The latter option has both its merits and demerits. The leasing of equipment as a method of capital finance will ensure that the company spends less compared to purchasing. There is less tax deduction compared to the purchase of an asset. It is so because the lease payment is deducted as a business expense on the tax return thus reducing the net cost of the lease. They have flexible terms as they are easier to acquire and have more elastic or flexible terms than loans for purchase of the assets. It is also easier to upgrade the asset after its five years of usefulness or when it becomes obsolescence. The demerits of this type of financing include the high overall cost and the obligation to pay cash for the full lease term. Finally, the company will not own the asset after the expiry of the lease term.
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Equity financing is also a means of trading a share of the possession of the business for a financial venture in the business. This kind of arrangement allows the investors to share on the proceeds or profits of the company (Finkler, Steven A. et al. 2013). The equity or investment in the company by the shareholders is not repaid at a later date. The equity financing can take the form of membership units or stocks.
The company can search for venture capitalists. They will provide the cash required for investment but in exchange of shares in the firm. The investors assist companies that are successful or have a proven track record. In this case, MMWC should prove that they have a high demand for its products and their means of gaining a competitive advantage compared to their competitors.
Growth Plans and the Machine Usage
The management should consider the plans of the business and how the machine will fit in the long term. The MMWC does not have enough jobs to make sure that the equipment is fully utilized. There is no any plan that is set to make sure that in the coming years there will be enough job for the equipment. Estimating the extra work that the machine can handle vis-à-vis the returns, it is not profitable to acquire the new asset. Further, the company should look at the running cost of the equipment to check if it impacts considerably the general cost of the asset over its lifetime.
Time is a great factor to consider when purchasing an asset. The equipment that cost $ 700,000 is likely to serve for five years after which it becomes obsolete. So the company may choose not to fully own it as it will need to make another hefty purchase five years to come. Therefore, financing the asset through lease is the viable option in this case.
After analyzing the merit and demerit of financing the purchase of the new equipment, the paper recommends that MMWC should lease the equipment rather than buying it. The reason for this is that the equipment is expensive and it does not have a resale value. The paper has explored and presented an endorsement backing the type of financial influence the development of facilities will have on MMWC. Considering the cost of capital that is at 9 percent and the interest on the loan at 8 percent per annum, the paper recommends that the MMWC refrains from acquiring the loan from the bank for the purpose of purchasing the asset.
Finkler, Steven A., Thad Calabrese, Robert Purtell, Daniel Smith (2012). Financial Management for Public, Health, and Not-for-Profit Organizations, 4th Edition. Pearson Learning Solutions. VitalBook file.