Mathematics for FinanceMTP Dec 23 - Series IIQuestion 1591 of 512
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A machine can be purchased for 50,000\displaystyle 50,000. Machine will contribute 12000\displaystyle 12000 per year for the next five years. Assume borrowing cost is 10%\displaystyle 10\% per annum compounded annually. Determine whether machine should be purchased or not.

Options

APurchased
BNot purchased
CInformation insufficient
DNone of these
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Correct Answer

✅ Option b — Not purchased

All Options:

  • APurchased
  • BNot purchased
  • CInformation insufficient
  • DNone of these

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 cost: PV=R×P(n,i)PV = R \times P(n, i) Given: * 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 contributions (45,489.48\displaystyle 45,489.48) is less than the purchase cost (50,000\displaystyle 50,000), the machine should not be purchased. Hence, **Option B** is the correct answer.

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