Photo AI
A business owns a $2 million building with a $500,000 mortgage - HSC - SSCE Business Studies - Question 18 - 2022 - Paper 1
Question 18
A business owns a $2 million building with a $500,000 mortgage. They decide to sell the building and lease it back from the new owners over five years. What is the ... show full transcript
Worked Solution & Example Answer:A business owns a $2 million building with a $500,000 mortgage - HSC - SSCE Business Studies - Question 18 - 2022 - Paper 1
Step 1
What is the likely purpose of this financial strategy?
Answer
The purpose of selling the building and leasing it back is primarily to improve working capital. By selling the asset, the business liquidates a significant portion of its investment and can use those funds for operational needs or other investments. Although this transaction incurs lease expenses, the immediate influx of cash generally enhances the business's liquidity and financial flexibility.