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Hello Lisa .
I was solving the BPP kit , but got stuck in this question .Q 1. A lease versus buy evaluation has been performed. The management accountant performed the calculation by taking the saved initial outlay and deducting the tax-adjusted lease payments and the lost capital allowances. The accountant discounted the net cash flows at the post-tax cost of borrowing. The resultant net present value (NPV) was positive.
Assuming the calculation is free from arithmetical errors, what would the conclusion for this decision be?
? Lease is better than buy
? Buy is better than lease
? A further calculation is needed
? The discount rate was wrong so a conclusion cannot be drawn
(2 marks)Also ,
Q2. Does Raw material holding period + WIP inventory holding period + Finished goods inventory period = Inventory Holding period ?
i couldn’t find this stated as such anywhere , so just wanted to confirm : )It would be great if you could clarify them : )
Thank youHello Maria,
That’s my daughters name…With regards to Q1
Lease is better than buy.
This is because a positive net present value (NPV) indicates that the net savings from leasing, compared to buying, are greater than the costs associated with leasing.
Therefore, leasing is the more financially advantageous option in this scenario.
Q2
The sum of the raw material holding period, work-in-progress holding period, and finished goods holding period is not equal to the inventory holding period. Instead, the sum of these holding periods is equal to the working capital cycle.
The inventory holding period tells the company how long funds are tied up in the form of inventory before they are realised as sales.
AVE INV/COS * 365
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