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Oh machine can be purchased for Rs.50,000 machine will contribute Rs.12,000 per year for the next five years has been mean borrowing costs 10% per annum. Determine whether the machine should be purchased or not?
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Oh machine can be purchased for Rs.50,000 machine will contribute Rs.1...
Decision to Purchase Machine
- Cost of Machine: Rs.50,000
- Contribution: Rs.12,000 per year for 5 years
- Borrowing Cost: 10% per annum
Calculation of Net Present Value (NPV)
- NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time
- In this case, the cash inflows are the contributions from the machine, and the cash outflows are the cost of the machine and the borrowing costs
- NPV is calculated using the following formula: NPV = (Cash inflows / (1 + r)^n) - (Cash outflows / (1 + r)^n)
- Where r is the discount rate (borrowing cost) and n is the number of years
- Using the given values, we can calculate the NPV as follows:
NPV = (12,000 / (1 + 0.1)^1) + (12,000 / (1 + 0.1)^2) + (12,000 / (1 + 0.1)^3) + (12,000 / (1 + 0.1)^4) + (12,000 / (1 + 0.1)^5) - 50,000
NPV = 10,433.82
Analysis and Conclusion
- If NPV is positive, the investment is profitable and should be undertaken
- If NPV is negative, the investment is unprofitable and should be avoided
- In this case, the NPV is positive (10,433.82), which means that the investment is profitable and should be undertaken
- Therefore, the machine should be purchased as it will generate a positive cash flow over the next 5 years
Limitations
- The calculation of NPV assumes that the cash inflows and outflows are certain and predictable, which may not always be the case in real-world scenarios
- The borrowing cost may change over time, which would affect the NPV
- Other factors such as maintenance costs, replacement costs, and inflation should also be considered when making investment decisions
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Oh machine can be purchased for Rs.50,000 machine will contribute Rs.12,000 per year for the next five years has been mean borrowing costs 10% per annum. Determine whether the machine should be purchased or not?
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Oh machine can be purchased for Rs.50,000 machine will contribute Rs.12,000 per year for the next five years has been mean borrowing costs 10% per annum. Determine whether the machine should be purchased or not? 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 Oh machine can be purchased for Rs.50,000 machine will contribute Rs.12,000 per year for the next five years has been mean borrowing costs 10% per annum. Determine whether the machine should be purchased or not? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Oh machine can be purchased for Rs.50,000 machine will contribute Rs.12,000 per year for the next five years has been mean borrowing costs 10% per annum. Determine whether the machine should be purchased or not?.
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