FIN.16:5.1 - A higher-value purchase needs finance before commitment

Consider a separate constructed case in one currency. Opening usable cash is 75. An existing operating payment of 20 falls on day 4, and cash must remain at least 20 throughout. Two mutually exclusive purchases are available on day 5. A costs 50 and returns 62 on day 30; B costs 30 and returns 38 on day 30. These receipts and all operating effects are stipulated, and the comparison uses zero discounting, no tax and no other flows. A and B therefore add 12 and 8 before financing. Their independent financial construction is supplied here.

After the operating payment, cash is 55 and only 35 can be spent while preserving the reserve. A needs net finance of 15 before its payment; B needs none. An obtainable loan supplies 15 before day 5 and requires 18 on day 30 after the purchase receipt. Its financing cost of 3 is additional to the supplied purchase account. Under A, cash becomes 70 before payment, 20 afterward, then 82 on receipt and 64 after repayment. Under B it becomes 25 after purchase and 63 on receipt. Keeping the baseline would leave 55.

The useful recommendation is: choose A if this net advance is secured and usable before the day-5 purchase, because its financed gain is 9 against B’s 8 and its dated cash remains at least 20. If the advance is unavailable in time, B remains a feasible alternative. The preference has a margin of 1. A financing charge of 4 makes the gains equal, and a charge above 4 removes A’s advantage under the stated value criterion. If the lender deducts a charge before disbursement, recalculate the usable advance and the dated cash before relying on the same gross loan amount.

Now suppose A’s day-30 receipt becomes uncertain and could be only 52. Its financed gain in that branch is −1 and ending cash is 54, while B’s stipulated gain remains 8. Those two A scenarios do not supply probabilities. The analyst returns the choice-changing receipt question or a conditional comparison; the original unconditional preference is no longer supported. A statement that A still has the larger headline receipt would hide the changed net consequence.