Mathematics for FinanceMTP March 21Question 1570 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 four years at an annual rate of 1,250\displaystyle 1,250. Which course of action is preferable if the company can borrow

Options

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

✅ Option a — Leasing 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×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 * Interest rate (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. Hence, **Option A** is the correct answer.

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