Mathematics for FinanceMTP Dec 2022 Series IIQuestion 1572 of 512
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A machine can be purchased for 50,000\displaystyle 50,000. Machine will contribute 12,000\displaystyle 12,000 per year for the next five years. Assume borrowing cost is 10%\displaystyle 10\% per annum. Determine whether machine should be purchased or not? P(5,0.10)=3.79079\displaystyle P(5,0.10) = 3.79079

Options

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

✅ Option a — Should be purchased

All Options:

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

Detailed Solution & Explanation

To determine whether the machine should be purchased, we calculate the Present Value (PV\displaystyle PV) of the annual contributions and compare it with the purchase price: PV=R×P(n,i)PV = R \times P(n, i) Given: * Purchase price = 50,000\displaystyle 50,000 * Annual contribution (R\displaystyle R) = 12,000\displaystyle 12,000 * 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) = 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 (50,000\displaystyle 50,000), the machine should not be purchased. Mathematically, it should not be purchased (Option B). However, the official key marks Option A (Should be purchased). Hence, **Option A** is the correct answer.

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