Critically analyse whether the finance director should recommend taking out a loan and forward buying the annual requirement at this year’s prices. Use your workings to support your recommendations

A business imports its phosphate raw materials. The Finance Director must recommend to the board what forward strategy they should use to maximize returns on their stock purchases. The supplier has said that the cost of the raw materials, without transport costs, will increase by 12.5% from 1 January because of production capacity issues. The current cost of the raw materials used by the business is ₤50 000 per year, and is purchased quarterly in January, April, July and Oct. The cost of business finance is 15% and inflation is expected remain constant at 5% until June, rising to 6% from July next year.
Critically analyse whether the finance director should recommend taking out a loan and forward buying the annual requirement at this year’s prices. Use your workings to support your recommendations

 

 

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