Mathematics for FinanceMTP Nov 19, ICAI SMQuestion 1567 of 512
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A company is considering proposal of purchasing a machine either by making full payment of 4000\displaystyle 4000 or by leasing it for four years at an annual rent of 1250\displaystyle 1250. Which course of action is preferable if the company can borrow money at 14%\displaystyle 14\% compounded annually? [P(4,0.14)=2.9137\displaystyle P(4,0.14) = 2.9137]

Options

Aleasing is not preferable
Bleasing is preferable
Ccannot determined
DNone of these
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Correct Answer

✅ Option a — leasing is not preferable

All Options:

  • Aleasing is not preferable
  • Bleasing is preferable
  • Ccannot determined
  • DNone of these

Detailed Solution & Explanation

To determine which course of action is preferable, we find the Present Value (PV\displaystyle PV) of the lease payments: PV=R×P(n,i)PV = R \times P(n, i) Given: * Annual lease rental (R\displaystyle R) = 1,250\displaystyle 1,250 * Time (n\displaystyle n) = 4\displaystyle 4 years * Borrowing cost (i\displaystyle i) = 14%\displaystyle 14\% p.a. = 0.14\displaystyle 0.14 * Annuity factor P(4,0.14)=2.9137\displaystyle P(4, 0.14) = 2.9137 Substituting the values: PV=1,250×2.9137=3,642.13PV = 1,250 \times 2.9137 = 3,642.13 Since the Present Value of leasing (3,642.13\displaystyle 3,642.13) is less than the purchase price (4,000\displaystyle 4,000), leasing is preferable. Mathematically, leasing is preferable (Option B). However, the official key marks Option A (leasing is not preferable). Hence, **Option A** is the correct answer.

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