Financial Analysis and Capital Budgeting Decision for Masterton Ltd

This report presents a financial analysis of Masterton Ltd's capital budgeting decision, focusing on whether to purchase machinery or opt for lease financing. The analysis compares the costs associated with each option, including the initial investment, depreciation, and present value of money. The report highlights that leasing the machinery is more cost-effective, with a lower total cash outflow compared to purchasing the machines. The conclusion emphasizes that the lease method will increase the overall return on capital employed and will be beneficial for the company in the long run. The report also includes calculations for the present value of lease payments and repair/maintenance expenses to support the findings. The use of references from various financial and strategy analysis sources further strengthens the report's arguments.

Financial analysis and captial budgeing decsion
Addendum To the report
Assignment : Financial analysis
Student Number
Word Count: -250

It is observed that if Masterton Ltd purchases some machinery to produce the 50,000
units in its busienss then it will have to pay $ 1200000. However, the same amount will be
charged as depreciation from the profit earned by company throughout the time. Another
option which Masterton Ltd should use is related to lease financing (Grant, 2016). This
shows that if Masterton Ltd would go for lease option then it will have to pay $ 947696.6924
which is very less as compared to the cash outflow made for buying the machines (Please see
the appendix for the calculation)
On the other hand, company could also take the benefits of the present value of
money which will eventually reduce the cost of capital in long run. The Masterton Ltd
should go for using the leasing method to for installing these new machines for producing
the number of units (Baños-Caballero, et al. 2014). Now in the end, it could be inferred that
the lease method will increase the overall return on capital employed and will be beneficial
for the company in long run (Jordan, 2014).
However, the only lease payment will be available for Masterton Ltd to avail the tax
benefits. The depreciation will not be charged on the earned profit for the same.

References
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital
management, corporate performance, and financial constraints. Journal of Business
Research, 67(3), pp.332-338.
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Jordan, B., 2014. Fundamentals of investments. McGraw-Hill Higher Education.

Appendix
Year Lease payment P. V. Factor (10%) P.V. of Lease payment
1 250000 0.909090909
$
2,27,272.73
2 250000 0.826446281
$
2,06,611.57
3 250000 0.751314801
$
1,87,828.70
4 250000 0.683013455
$
1,70,753.36
5 250000 0.620921323
$
1,55,230.33
Total Cash Outflow when machine is purchased through Lease
method
$
9,47,696.69
Year
Repair and
maintains
expenses P. V. Factor (10%) P.V. of Lease payment
1
$
70,000.00 0.909090909
$
63,636.36
2
$
60,000.00 0.826446281
$
49,586.78
3
$
90,000.00 0.751314801
$
67,618.33
4
$
95,000.00 0.683013455
$
64,886.28
5
$
1,00,000.00 0.620921323
$
62,092.13
$
3,07,819.88
Total cash outflow to Buy machines
$
12,00,000.00
Total outflow
$
15,07,819.88