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The construction contractor is preparing to replace the critical earthmoving plant and equipment so that...

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Accounting

The construction contractor is preparing to replace the critical earthmoving plant and equipment so that they can consolidate future bids.

The anticipated cost of the digger with a maximum-sized bucket is 85,000. It needs to be bought in around 4 years time. However, an industrial development fund is willing to loan the construction contractors at a rate of 12% per annum if we can purchase the digger by the end of the week.

The contractors accountant thinks there is a possibility of outright purchase of the digger in 4 years time if the contractor can create a sinking fund at a rate of 6% per annum.

  1. Can you assist with calculating the cost of finance to purchase the digger for 85,000 using the loan from industrial development fund?

  1. Calculate the amount of money the contractor should reserve (sinking fund) per year for it to make an outright purchase, as proposed by the accountant?

  1. Explain how the financial health of the construction contractor is able to influence the decision of outright purchase using a loan today or the creation of a sinking fund for the next 4 years?

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