Question

3. A person wants to lease out a machine costing 5,00,000 for a 10 year period. It
has fixed a rental of 51, 272 per annum payable annually starting from the end
of first year. Suppose rate of interest is 10% per annum compounded annually on
which money can be invested. To whom this agreement is favourable?
(a) Favour of lessee
(b) Favour of lessor
(c) Not for both
(d) Can't be determined​

Answer 1

Answer:

(a) favor for lessee as the pv of annuity is less than the actual cost

Answer 2

Concept Introduction:

In relation to the amount lent, invested, or borrowed, the level of interest due each period is expressed as an interest rate. The amount lent or borrowed, as well as the interest rate, frequency of compounding, and the period of time during which it is loaned, deposited, or borrowed, all affect how much interest will be charged overall.

Given, A person wants to lease out a machine costing $5,00,000$ for a $10$ year period. It has fixed a rental of $51, 272$ per annum payable annually starting from the enof first year. Suppose rate of interest is $10$% per annum compounded annually on which money can be invested.

To find, to whom this agreement is favourable

Solution:

According to the rule,

The annuity cost will be = $(51272(1-(1+10/100))-1)/10/100$

$= 315044$

So, the annuity cost is less than the machine costing.

And the favour will be for lessee.

Final Answer:

The favour will be for lessee.

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