Question

Newton Company is privately owned by four individuals. The company sells athletic shoes, clothing, and accessories. An existing piece of equipment that keeps breaking down must be replaced. Management has asked for your opinion about how to fiance the cost of this equipment.

What kind of questions would you ask management?

What information would you need to research to make a decision?

Pick one method you might recommend and deceive the advantages and disadvantages of this recommendation.

Answer 1

Requirement 1

It is significant to study valuable information from the company’s management erstwhile to making any conclusion. Therefore, it is vital to consider some questions that will guide pool of significant information about the company’s business activities. For example, was the equipment given a warrant during the time of buying? And if so what was the warrant period? What was the model of this equipment? Are the individuals or workers handling the equipment techno savvy of handling the machine or equipment? What is the source of finance, the management is considering at the moment?

Requirement 2

It is vital to explore numerous accessible choices concerning the source of funds to finance the cost of equipment. For this cause, there are numerous sources of finance to sustain the cost of this equipment. Therefore, it is crucial to look at the best choice which has more rewards than drawbacks. Also, it will be good to get information from the workers so as to recognize if they have essential skills of handling the equipment. Some of the most common sources of finance comprise the capital markets; bank borrowing; franchising; government sources; retained earnings; loan stock; venture capital; and business expansion scheme funds. But, we have to get one from these which is effective considering the company’s financial position .

Requirement 3

After observing at the information provided from the inquiry, it will be easier for me to give a better alternative. I endorse the management to study retained earnings to finance the cost of this equipment. However, this choice has both rewards and drawbacks. The rewards of this selection comprise: the growth benefits- it is a capital available for the growth and expansion of a business. Scheming new products and services requires research and development, and these costs can be quite high. It is better fund the project by use of retained profits. The retained earnings are connected with increased return on investments and shareholder equity. Some of drawbacks include higher taxes- the company has to pay federal and state taxes