A machine can be purchased for Rs.50000. Machine will contribute Rs.12000 percthe next five years. Assume borrowing cost10% per annum compounded annually. Determine whether
machine would be purchased or not?
(a) Purchased
(b) Not purchased
(c) Profitable
(d) None of the above
Answers
Answered by
42
The machine should not be purchased.
Step-by-step explanation:
In order to decide whether to purchase the machine or not, the present value of the annual contribution is computed by the formula:
V = A, P₍n, i₎
where
A is Rs 12,000
n is 5 years
i is 10%
=Rs 12,000 × P₍5, 0.10₎
= Rs12,000 × 3.791
= Rs 45,492
The present value is less than the initial cost of the machine which is Rs 50,000. So, it will be purchased.
Note: The value 3.971 (For 5 years at 10% cost) is taken from the Present Value Annuity table.
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