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A Machine with useful life of seven years costs 10000 while another machine with useful life of five years costs 8000. The first machine saves labour expenses of ₹1900 annually and the second one saves costs 2200 annually . Determine the preferred course of action. Assume cost of borrowing as 10% compounded per annum. Buy lst Machine f b) Buy 2 nd Machine?
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A Machine with useful life of seven years costs 10000 while another ma...
Solution:

Given:

Cost of 1st machine (C1) = ₹10000

Useful life of 1st machine (N1) = 7 years

Annual saving in labour expenses by 1st machine (S1) = ₹1900

Cost of 2nd machine (C2) = ₹8000

Useful life of 2nd machine (N2) = 5 years

Annual saving in costs by 2nd machine (S2) = ₹2200

Cost of borrowing (r) = 10% compounded annually

To determine the preferred course of action, we need to compare the present value of cash outflows (i.e. cost of purchasing the machine) and present value of cash inflows (i.e. savings in labour expenses or costs) for both machines.

Present Value (PV) of cash outflows for each machine can be calculated using the following formula:

PV = C / (1+r)^N

where C is the cost of machine, r is the cost of borrowing and N is the useful life of the machine.

Present Value (PV) of cash inflows for each machine can be calculated using the following formula:

PV = S * [(1-(1/(1+r)^N))/r]

where S is the annual savings in labour expenses or costs, r is the cost of borrowing and N is the useful life of the machine.

Calculation:

1. For 1st Machine:

PV of cash outflows = 10000 / (1+0.1)^7 = ₹4804

PV of cash inflows = 1900 * [(1-(1/(1+0.1)^7))/0.1] = ₹8884

Net Present Value (NPV) = PV of cash inflows - PV of cash outflows = ₹4080

2. For 2nd Machine:

PV of cash outflows = 8000 / (1+0.1)^5 = ₹4979

PV of cash inflows = 2200 * [(1-(1/(1+0.1)^5))/0.1] = ₹8757

Net Present Value (NPV) = PV of cash inflows - PV of cash outflows = ₹3778

Conclusion:

As per the above calculation, the 1st machine has a higher NPV of ₹4080 compared to the 2nd machine which has a NPV of ₹3778. Therefore, the preferred course of action would be to buy the 1st machine.
Community Answer
A Machine with useful life of seven years costs 10000 while another ma...
B) buy 2 nd machinery
use the equation of present value ordinary
the we will get present value of A=9249 B=8339
and since the case it is advisable to buy machinery B
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A Machine with useful life of seven years costs 10000 while another machine with useful life of five years costs 8000. The first machine saves labour expenses of ₹1900 annually and the second one saves costs 2200 annually . Determine the preferred course of action. Assume cost of borrowing as 10% compounded per annum. Buy lst Machine f b) Buy 2 nd Machine?
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A Machine with useful life of seven years costs 10000 while another machine with useful life of five years costs 8000. The first machine saves labour expenses of ₹1900 annually and the second one saves costs 2200 annually . Determine the preferred course of action. Assume cost of borrowing as 10% compounded per annum. Buy lst Machine f b) Buy 2 nd Machine? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about A Machine with useful life of seven years costs 10000 while another machine with useful life of five years costs 8000. The first machine saves labour expenses of ₹1900 annually and the second one saves costs 2200 annually . Determine the preferred course of action. Assume cost of borrowing as 10% compounded per annum. Buy lst Machine f b) Buy 2 nd Machine? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A Machine with useful life of seven years costs 10000 while another machine with useful life of five years costs 8000. The first machine saves labour expenses of ₹1900 annually and the second one saves costs 2200 annually . Determine the preferred course of action. Assume cost of borrowing as 10% compounded per annum. Buy lst Machine f b) Buy 2 nd Machine?.
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