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Mike owns a small business called Palindrone. He started the business three years ago making drones to sell to other businesses and the general public.

Mike plans to start making and selling a new type of drone. He predicts that he will sell 60 units per year. Mike has made some financial forecasts and created the following break-even chart for the new drone.

Palindrone has been trading for three years and Mike is looking at the past financial performance of the business. Mike takes drawings every month for his own personal use. Palindrone has not purchased or sold any non-current assets in the last three years. It uses machinery that is outdated compared to the machinery used by many of its competitors.

Extracts from the statements of financial position for Palindrone for the last three years

	31 December 2020	31 December 2019	31 December 2018
Non-current assets	49 537	56 534	62 567
Opening capital	425 567	432 489	438 754
Add profit for the year	52 000	46 567	43 567
Less drawings	61 567	53 489	49 832
Closing capital	416 000	425 567	432 489

(e) Analyse the possible implications this financial information could have on the future of the business.

Mike is hoping to expand Palindrone quickly. Its current machinery is becoming outdated and the business needs to update its technology to remain competitive. The cost of a new machine is 40 000 and Mike is wondering how to fund this purchase. He has two options to choose from.

Option 1

Lease a new machine.

Leasing a machine will cost 1 000 per month. This cost includes any repair costs. The lease is for a minimum of two years. It can be cancelled after this point if two months notice is given. An extra 1 500 fee must be paid for ending the lease early. The leasing company will deliver and install the machine.

Option 2

Purchase a new machine using a loan with a variable rate of interest over five years.

The loan repayment will be initially 800 per month. The loan will be secured against the business premises. The delivery and installation of the machine will cost an extra 1 200. Mike will also have to pay for any repairs once the machines three-year guarantee ends.

(f) Evaluate whether Mike should lease (Option 1) or use a loan (Option 2) to obtain the machine.

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