A Machine with useful life of seven years costs 10000 while another ma...
Analysis of the two options:
- Option 1: Buy the first machine
- Initial cost: ₹10,000
- Annual savings on labour expenses: ₹1,900
- Useful life: 7 years
- Option 2: Buy the second machine
- Initial cost: ₹8,000
- Annual savings on costs: ₹2,200
- Useful life: 5 years
Calculations:
- Option 1:
- Total savings over 7 years: ₹1,900 x 7 = ₹13,300
- Net cost after savings: ₹10,000 - ₹13,300 = -₹3,300 (profit)
- Option 2:
- Total savings over 5 years: ₹2,200 x 5 = ₹11,000
- Net cost after savings: ₹8,000 - ₹11,000 = -₹3,000 (profit)
Decision:
Both options result in a profit after considering the savings over the useful life of the machines. However, considering the time value of money and the cost of borrowing at 10% compounded annually, it is preferable to choose the option that generates a higher profit after adjusting for the cost of borrowing.
Conclusion:
Based on the calculations, it is more beneficial to buy the first machine as it generates a higher profit over its useful life even after considering the cost of borrowing. The first machine provides a net profit of ₹3,300, while the second machine provides a net profit of ₹3,000. Therefore, it is recommended to go with the first machine for a better financial outcome.
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