Mathematics of FinanceMCQMTP Nov 20Question 1569 of 512
All Questions

A company is considering proposal of purchasing a machine either by making full payment of 4,000\displaystyle 4,000 or by leasing it for 4\displaystyle 4 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\% per annum? [Given: (1.14)4=1.6870\displaystyle (1.14)^4 = 1.6870 ]

Options

ALeasing preferable
BLeasing is not preferable
CCan't say
DNone of these
For any discrepancies in this question, email contact@cadada.in

Correct Answer

Option bLeasing is not preferable

All Options:

  • ALeasing preferable
  • BLeasing is not preferable
  • CCan't say
  • DNone of these

Ad

Detailed Solution & Explanation

To determine which course of action is preferable, we compare the purchase price (4,000\displaystyle 4,000) with the Present Value (PV\displaystyle PV) of the lease rentals: PV=R×[1(1+i)ni]PV = R \times \left[ \frac{1 - (1+i)^{-n}}{i} \right] Given: * Annual lease rental (R\displaystyle R) = 1,250\displaystyle 1,250 * Time (n\displaystyle n) = 4\displaystyle 4 years * Interest rate (i\displaystyle i) = 14%\displaystyle 14\% p.a. = 0.14\displaystyle 0.14 Using the annuity factor P(4,0.14)2.9137\displaystyle P(4, 0.14) \approx 2.9137: 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 A). However, the official key marks Option B (Leasing is not preferable). Hence, **Option B** 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

Exam Strategy Tip

Guaranteed 12-16 marks. Master your calculator! Learn the 'GT' and compound interest M+/M- tricks to solve annuity questions in 10 seconds without writing long formulas.

Related Comparison Tables

More Questions from Mathematics of Finance

Ready to Master Mathematics of Finance?

Practice all 512 questions with instant feedback, earn XP, track your streaks, and ace your CA Foundation exam.

Start Practicing — It's Free