The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR...

The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. Following information is available:

1. The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum.


2. If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 of delivery cost is incurred for this purchase option.


3. If it is rented, £ 4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £ 500 (the delivery cost for purchase option). For the rent option, firm is not going to sell old machines.