Orchard Frame Works makes wooden display stands for independent retailers. Its manager has been offered a laser cutter costing $48 000. The new machine coul...

(a) The internal source of finance is retained profit. [2] It is money generated and kept by Orchard Frame Works, unlike a bank loan, leasing or supplier credit, which come from outside the business.

(b) Leasing is an agreement to use an asset owned by another business [1] in return for regular payments. [1] The user does not normally buy or own the asset at the start. [1]

(c) Retained profit is $15 000, [1] but the laser cutter costs $48 000. [1] Therefore:

\[\$48\,000-\$15\,000=\$33\,000\]

There is a $33 000 shortfall. [1] Using all retained profit would also remove the cash reserve needed if timber prices change or other expenses arise. [1]

(d) A bank loan provides borrowed money from a bank, [1] allowing Orchard Frame Works to buy and own the cutter. [1] Leasing permits use of a cutter that remains owned by the leasing company, [1] in return for monthly payments. [1] Both are external finance and create regular financial costs or commitments. [1]

(e) A strong choice is to use retained profit and a bank loan for the remaining amount. Using the full $15 000 would require a $33 000 loan. [1] This reduces borrowing and likely interest. [1] The firm would own the machine, [1] which is useful if it will be used for many years. [1]

However, because the manager wants a cash reserve, using only some retained profit and leasing may be better if cash flow is uncertain. [1] Leasing avoids a large immediate purchase cost, although total lease payments may be higher. [1] The final decision should balance ownership and lower borrowing against the need to retain cash for changing timber costs.