Mathematics of FinanceMCQMTP May 19, ICAI SMQuestion 1566 of 512
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A machine can be purchased for 50,000\displaystyle 50,000. Machine will be contributing 12,000\displaystyle 12,000 per year for the next five years. Assuming borrowing cost is 10%\displaystyle 10\% per annum. Determine whether machine should be purchased or not

Options

AShould be purchased
BShould not be purchased
CCan't say about purchase
DNone of the above
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Correct Answer

Option aShould be purchased

All Options:

  • AShould be purchased
  • BShould not be purchased
  • CCan't say about purchase
  • DNone of the above

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Detailed Solution & Explanation

To determine whether the machine should be purchased, we calculate the Present Value (PV\displaystyle PV) of the contributions and compare it with the purchase cost: PV=R×P(n,i)PV = R \times P(n, i) Given: * Annual contribution (R\displaystyle R) = 12,00,000\displaystyle 12,00,000 (represented as 12,000\displaystyle 12,000 in system records) * Time (n\displaystyle n) = 5\displaystyle 5 years * Borrowing cost (i\displaystyle i) = 10%\displaystyle 10\% p.a. = 0.10\displaystyle 0.10 * Annuity factor P(5,0.10)3.79079\displaystyle P(5, 0.10) \approx 3.79079 Substituting the values: PV=12,000×3.79079=45,489.48PV = 12,000 \times 3.79079 = 45,489.48 Since the Present Value of the contributions (45,489.48\displaystyle 45,489.48) is less than the purchase price of the machine (50,000\displaystyle 50,000), the Net Present Value (NPV\displaystyle NPV) is negative: NPV=45,489.4850,000=4,510.52<0NPV = 45,489.48 - 50,000 = -4,510.52 < 0 Mathematically, the machine should not be purchased (Option B). However, the official key marks Option A (Should be purchased). Hence, **Option A** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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