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

Select Your Answer (Keyboard: A, B, C, D)
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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 ×\displaystyle \times P(n, i) Given: * Annual contribution (R\displaystyle R) = $12,000$ * Time (n\displaystyle n) = 5\displaystyle 5 years * Borrowing cost (i\displaystyle i) = $10\%\displaystyle p.a. = $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 ×\displaystyle \times 3.79079 = 45,489.48 Since the Present Value of contributions ($45,489.48$) is less than the purchase cost ($50,000$), the machine should not be purchased. Hence, **Option B** 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

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