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Investment Decision Sample Assignment

A machine which has a life of five years yields Rs. 1,000, Rs. 1,000, Rs. 1, 000 Rs. 850 and Rs. 700 in first year, second year, third year, fourth year and the fifth year, respectively. Its present cost is Rs. 3.000 and the market rate of interest is 5 per cent. Is  it profitable to invest in the machine ?

Solution :

Present value of  the prospective yield

     Rs. 1,000       Rs.1,000     Rs. 1,000     Rs. 850    Rs. 700
=  ________  +  ________ + ________ +  _______ + _______
      (1.05)           (1.05)²         (1.05)^{3           (1.05)4           (1.05)5}

=  952.75 + Rs. 907 + Rs. 803 + Rs, 700 +Rs. 550.25
=  Rs. 3,913.
Since PV (Rs 3,913) > C (Rs, 3,000), this investment is profitable.

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