Tutorial 2
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paballopole04Tutorial 2 – Time Value of Money.
10 MARKS
You are a financial manager for Company Omega. It has been noted that production
has been slowing down over the past few years and the company has decided to
obtain a new machine. In doing so, the company narrowed down their options to 2
machines from different suppliers (supplier Alpha & supplier Beta). Both these
machines will offer the same output. As the financial manager, you have been tasked
with deciding whether to go with supplier Alpha or supplier Beta. Both suppliers have
different payment procedures and have given you their options below. Company
Omega uses a discount rate of 15%.
Supplier Alpha:
Supplier Alpha requires a payment of R100 000 at the end of the 1st year. After that
the payments will increase by 25% until the end of the 3rd year after which they will
increase by 20% until the final year. Supplier Alpha also requires a final payment of
R100 000.
Supplier Beta:
Supplier Beta requires payments of R13 000 at the beginning of each month for the
next 5 years.
Required: Marks
a) As the financial manager of company Omega which supplier would purchase 10
the machine from? Substantiate your answer with calculations.