Mathematics for FinanceMTP Nov 20Question 1569 of 512
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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
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Correct Answer

✅ Option b — Leasing is not preferable

All Options:

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

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.

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