- 15 Marks
MGE – Nov 2014 – L2 – Q7 – Risk Management and Corporate Strategy
Assessing risk in importing machinery and comparing finance vs. operating lease strategies for construction equipment.
Question
EXPEE CONSTRUCTION PLC.
Expee Construction Plc. has been awarded a contract to construct a 50-kilometer feeder road from Abekoko to Idi Magoro by Adatan State. Unfortunately, the company’s earth-moving machine (bulldozer) suffered a major mechanical fault, making it impossible to mobilize to the site for execution of the contract.
Similar machines are not available for sale in the open market. Management is therefore considering the option of either importing a new machine from Japan or leasing one from Odogunyan Machines Limited located in Eko-Akete. The lease may be a finance or operating lease; either option would release the machine to the lessee for immediate use. Management’s decision on this choice is dependent on its willingness to either retain or transfer the risks involved in the usage of the machine.
Required:
a. Evaluate the risk exposure of the company in adopting the import option.
(5 Marks)
b. Identify and formulate strategies that might be used by the company in managing:
i. The finance lease option
(5 Marks)
ii. The operating lease option
(5 Marks)
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