Question

A machine is purchased which will produce earnings of Rs. 1000 per year while it lasts. The machine costs Rs. 6000 and will have a salvage of Rs. 2000 when it is condemned. If 12 percent per annum can be earned on alternate investments, what would be the minimum life of the machine to make it a more attractive investment compared to alternative investment?

Answer 1

To determine the minimum life of the machine, compare the present value of the machine's earnings to the present value of the alternate investment using the formulas for present value. This will help identify the more attractive investment option.

Step-by-step explanation:

To determine the minimum life of the machine that would make it a more attractive investment compared to alternate investment, we need to compare the present value of the machine's earnings to the present value of the alternate investment.

The present value of the machine's earnings can be calculated using the formula:

Present Value = Earnings / (1 + Interest Rate)^t

Where Earnings = Rs. 1000, Interest Rate = 12%, and t is the number of years.

Similarly, the present value of the alternate investment can be calculated using the formula:

Present Value = Investment / (1 + Interest Rate)^t

Where Investment = Rs. 6000 - Rs. 2000 = Rs. 4000 (initial cost of the machine minus salvage value), Interest Rate = 12%, and t is the number of years.

By comparing the present values of both investments, we can find the minimum life required for the machine to be a more attractive investment.