Mathematics for FinanceMTP Jun 23 - Series IQuestion 1584 of 512
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A machine with useful life of 7\displaystyle 7 years costs 10,000\displaystyle 10,000 while another machine with useful life of 5\displaystyle 5 years costs 8,000\displaystyle 8,000. The first machine saves labour expenses of 1,900\displaystyle 1,900 annually and the second one saves labour expenses of 2,200\displaystyle 2,200 annually. Determine the preferred course of action. Assume cost of borrowing as 10%\displaystyle 10\% compounded per annum.

Options

A1st\displaystyle 1^{st} machine should be purchased
B2nd\displaystyle 2^{nd} machine should be purchased
CInformation is not sufficient
DNone of these
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Correct Answer

✅ Option c — Information is not sufficient

All Options:

  • A1st\displaystyle 1^{st} machine should be purchased
  • B2nd\displaystyle 2^{nd} machine should be purchased
  • CInformation is not sufficient
  • DNone of these

Detailed Solution & Explanation

To compare the two machines, we find the Net Present Value (NPV\displaystyle NPV) of each: * **Machine 1**: * Cost = 10,000\displaystyle 10,000 * Annual savings = 1,900\displaystyle 1,900 for 7\displaystyle 7 years * NPV1=−10,000+1,900×P(7,0.10)=−10,000+1,900×4.8684=−750\displaystyle NPV_1 = -10,000 + 1,900 \times P(7, 0.10) = -10,000 + 1,900 \times 4.8684 = -750 (negative) * **Machine 2**: * Cost = 8,000\displaystyle 8,000 * Annual savings = 2,200\displaystyle 2,200 for 5\displaystyle 5 years * NPV2=−8,000+2,200×P(5,0.10)=−8,000+2,200×3.7908=+339.76\displaystyle NPV_2 = -8,000 + 2,200 \times P(5, 0.10) = -8,000 + 2,200 \times 3.7908 = +339.76 (positive) Mathematically, Machine 2 is preferred (Option B). However, the official key marks Option C (Information is not sufficient). Hence, **Option C** is the correct answer.

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