Mathematics of FinanceMCQMTP Jun 23 - Series IQuestion 1584 of 512
All Questions

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
For any discrepancies in this question, email contact@cadada.in

Correct Answer

Option cInformation 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

Ad

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.

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