Time Value of Money

Concept:Compare the present value of future cash inflows with the initial cost using the discount rate.Explanation:The machine costs Rs. 50,000.It gives Rs. 12,000 per year for 5 years.The borrowing cost is $10\%$ per annum.Compute the present value (PV) of the annuity:$PV = 12000 \times \frac{1 - (1.10)^{-5}}{0.10}$$(1.10)^{-5} \approx 0.62092$$PV = 12000 \times \frac{0.37908}{0.10} = 12000 \times 3.7908 = 45489.60$Since $PV = 45489.60 < 50000$, the inflow is less than the cost.Therefore, the machine should not be purchased.Answer:Not purchased