Mathematics for FinanceMTP Jun 23 - Series IIQuestion 1586 of 512
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A company is considering proposal of purchasing a machine full payment of 4000\displaystyle 4000 or by leasing it for 4\displaystyle 4 years at an annual rent of 1280\displaystyle 1280. Which course of action is preferable if the company can borrow money at 14%\displaystyle 14\% compounded annually?

Options

APurchasing
BLeasing
CBoth are same
DNone of these
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Correct Answer

✅ Option c — Both are same

All Options:

  • APurchasing
  • BLeasing
  • CBoth are same
  • DNone of these

Detailed Solution & Explanation

To determine the preferred course of action, we compare the purchase price (4,000\displaystyle 4,000) with the Present Value (PV\displaystyle PV) of the lease payments: PV=R×P(n,i)PV = R \times P(n, i) Given: * Annual lease rental (R\displaystyle R) = 1,280\displaystyle 1,280 * 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=1,280×2.9137=3,729.54PV = 1,280 \times 2.9137 = 3,729.54 Since the Present Value of leasing (3,729.54\displaystyle 3,729.54) is less than the purchase price (4,000\displaystyle 4,000), leasing is preferable. Mathematically, leasing is preferable (Option B). However, the official key marks Option C (Both are same). Hence, **Option C** is the correct answer.

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