leasing solution ca-final sfm (full)

PRAVINN MAHAJAN 9871255244, 8800684854

1

LEASING

Q1 Sunderam ltd.Is contemplating to acquire machine worth Rs 10,00,000. Company has 2 options

1 To lease the asset at annual lease rentals of Rs 3,34,000 for 5 years.

2 To take a Bank loan @ 15% p.a repayable in 5 yearly installments of Rs 2,00,000 + Interest

.

Tax rate 35%

Discount rate 16%

Depreciation 15% WDV

Option 1 Taking the asset on lease.

Lease rent p.a Rs 3,34,000

Tax savings on Lease Rent

3,34,000 (0.35) Rs 1,16,900

Statement of Present Value of Cash Outflow

Amount Period Factor Present

@ 16% Value

Lease Rent 3,34,000 1-5 3.274 10,93,516

Tax saving 1,16,900 1-5 3.274 (3,82,731)

Net cash outlow 7,10,785

Option 2 Purchasing the asset by obtaining loan from bank

Loan of Rs 10,00,000 @ 15%

Annual installment Rs 2,00,000 + interest

Depreciation 15% p.a WDV basis

Statement of cash outflow

1 2 3 4 5

Payment of Principal 2,00,000 2,00,000 2,00,000 2,00,000 2,00,000

Interest @ 15% 1,50,000 1,20,000 90,000 60,000 30,000

Tax savings on interest 52,500 42,000 31,500 21,000 10,500

Depriciation 1,50,000 1,27,500 1,08,375 92,119 78,301

Book value after 5 years 4,43,705

Tax savings on Depreciation 52500 44625 37,931 32,242 27,405

Salvage value nil

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of Present value on cash outflows

Amount Period Factor@16% Present value

Principal 2,00,000 1-5 3.274 6,54,800

Interest 1,50,000 1end 0.862 1,29,300

1,20,000 2end 0.743 89,160

90,000 3end 0.641 57,690

60,000 4end 0.552 33,120

30,000 5end 0.476 14,280

Tax savings on Intt 52,500 1end 0.862 (45,255)

42,000 2end 0.743 (31,206)

31,500 3end 0.641 (20,192)

21,000 4end 0.552 (11,592)

10,500 5end 0.476 (4998)

Tax savings on Dep 52500 1end 0.862 (45,255)

44,625 2end 0.743 (33,156)

37,931 3end 0.641 (24,314)

32,242 4end 0.552 (17,798)

27,405 5end 0.476 (13,045)

Salvage value

Scrap value nil

Tax savings on

cap loss

(0 – 4,43,705)x 0.35 1,55,297 5end 0.476 (73,921)

Present value of cash outflow 6,57,619

Present value of cash outflow is lower in case of loan option, So loan option is better

PRAVINN MAHAJAN 9871255244, 8800684854

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Q2 Agrani Ltd needs Computer costing Rs 5,00,000. Company has 2 options

Option 1 To acquire the computer on lease at annual lease rent of Rs 1,25,000 payable at

Beginning of each year

Annual lease rent Rs 1,25,000

Tax savings on Lease rent

(1,25,000 x 0.4) Rs 50,000

Statement of present value of cash outflow in case of Lease option

Amount Period Factor Present value

@10%

Lease Rent 1,25,000 0 1 1,25,000

1,25,000 1-4beg 3.170 3,96,250

Tax savings on

lease rent 50,000 1-5end 3.791 (1,89,550)

Present value of Cash outflow 3,31,700

Option 2 To Purchase computer by borrowing from bank @ 12%

Loan from Bank Rs 5,00,000 @ 12% , principal repayable as 30%, 25%, 20%,

15%, and 10% along with Interest

Statement of Principal and Interest

Principal p.a Interest Tax saving on

Interest @ 40%

1end 1,50,000 (30%) 60,000 24,000

2end 1,25,000 (25%) 42,000 16,800

3end 1,00,000 (20%) 27,000 10,800

4end 75,000 (15%) 15,000 6,000

5end 50,000 (10%) 6,000 2400

Installment of loan and interest is payable to bank at the end of each year

Depreciation p.a on SLM basis 5,00,000 x 0.2 1,00,000

Tax saving on depreciation 1,00,000 x 0.4 40,000

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of Present value of cash outflow if asset is purchased

Particulars Amount Period Factor@ 10% Present

Value

Installment

(Principal +

Interest) 2,10,000 1end 0.909 1,90,890

1,67,000 2end 0.826 1,37,942

1,27,000 3end 0.751 95,377

90,000 4end 0.683 61,470

56,000 5end 0621 34,776

Tax savings on 24,000 1end 0.909 (21,816)

Interest 16,800 2end 0.826 (13,877)

10,800 3end 0.751 (8,111)

6,000 4end 0.683 (4098)

2,400 5end 0.621 (1,490)

Tax savings on

Depreciation 40,000 1-5end 3.791 (1,51,640)

Net cash outflow 3,19,423

It is better to purchase the asset by borrowing from ban, as cash outflow in loan option is lower

than cash outflow in lease option

Q3 ABC company decided to acquire Pulp control device for Rs 5,00,000, Company has 2 options

Option1 To acquire the asset on lease by paying annual lease rent of Rs 55,000 at

beginning of each year.

Lease rent p.a Rs 55,000 payable aty beginning of each year

Tax saving on lease rent 55,000 (1-0.5) = Rs 27,500

Discount rate is rate of Interest charge by bank after tax 10% ( 1 – 0.50) = 5%

Statement of Present value of cash outflow if asset is taken on lease

Amount Period Factor @ 5% Present

Value

Lease Rent 55,000 0 1 55,000

55,000 1-9 7.108 3,90,940

Tax saving on

lease rent 27,500 1-10 7.722 (2,12,355)

Present value of Cash out flow 2,33,585

PRAVINN MAHAJAN 9871255244, 8800684854

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Option 2 Purchase the Asset by borrowing from bank

Cost of Asset 5,00,000

Less Subsidy 50,000

Borrowing from bank 4,50,000

Loan of Rs 4,50,000 payable in 10 equal installments at the beginning of each year

Amount of each installment

Amount x factor = loan

Amount x 6.759 = 4,50,000

Amount = 66,578


Year Installment Interest Principal Principal outstanding

@ 10%

1beg 66,578 nil 66,578 450,000 – 66,578

= 3,83,422

2beg 66,578 38,342 28,236 3,83,422 – 28,236

= 355186

3beg 66,578 35,519 31,059 3,55,186 - 31,059

= 3,24,127

4beg 66,578 32,413 34,165 3,24,127 – 34,165

= 2,89,962

5beg 66,578 28,996 37,582 2,89,962 – 37,582

= 2,52,380

6beg 66,578 25,238 41,340 2,52,380 – 41,340

= 2,11,040

7beg 66,578 21,104 45,474 2,11,040 – 45474

= 1,65,566

8beg 66,578 16,557 50,021 1,65,566 – 50,021

= 1,15,545

9beg 66578 11,555 55,023 1,15,545 – 55,023

= 60,522

10beg 66,578 6,056 60,522 -

Depreciation on actual cost @ 10% p.a = 5,00,000 ÷ 10 = 50,000

Tax saving on depreciation = 50,000 x 0.50 = 25,000

Factor = 1÷ 1.10 =

= 9 times

GT

+1

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of present value of cash outflow if asset is purchased

Particulars Amount Period factor Present value

@ 5%

Installment 66,578 0 1 66,578

66578 1-9 7.108 4,73,236

Tax saving on

Interest 38,342 x 0.5

= 19,171 1e 0.952 (18,251)

35,519 x 0.5

= 17,760 2e 0.907 (16,108)

32,413x0.5

= 16,207 3e 0.864 (14,003)

28,996x 0.5

= 14,498 4e 0.823 (11,932)

25,238x0.5

= 12,619 5e 0.784 (9,893)

21,104x0.5

= 10,552 6e 0.746 (7,872)

16,557x0.5

= 8,279 7e 0.711 (5,886)

11,555x0.5

= 5,778 8e 0.677 (3,912)

6,056x0.5

= 3027 9e 0.645 (1,952)

Tax saving

On depreciation 25,000 1-10e 7.722 (1,93,050)


It is better to take asset on lease as cash outflow in lease option is lower than cash outflow in

loan option.

PRAVINN MAHAJAN 9871255244, 8800684854

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Q4 Company is planning to acquire a machine costing Rs 5,00,000. Company has two options

Option 1 To acquire the asset by taking a loan from Bank

Amount of Loan = Rs 5,00,000 @ 10%p.a


Year Principal Interest Tax savings on interest @ 30%

1 1,00,000 5,00,000 x 0.1 = 50,000 15,000

2 1,00,000 4,00,000 x 0.1 = 40,000 12,000

3 1,00,000 3,00,000 x 0.1 = 30,000 9,000

4 1,00,000 2,00,000 x 0.1 = 20,000 6,000

5 1,00,000 1,00,000 x 0.1 = 10,000 3,000

Depreciation - Machine will be fully depreciated during its lifetime

Depreciation p.a = 5,00,000 ÷ 5 = 1,00,000

Salvage value = Rs 50,000

Capital gain = Salvage value - Book value after life

= 50,000 – nil

= 50,000

Tax on capital gain = 50,000 x 0,3 = 15,000

Salvage value after Tax = 50,000 – 15,000 = 35,000

Statement of Present Value of cash outflow

Particulars Amount Period Factor Present

@ 8% Value

Principal 1,00,000 1-5end 3.993 3,99,300

Interest 50,000 1end 0.926 46,300

40,000 2end 0.857 34,280

30,000 3end 0.794 23,820

20,000 4end 0.735 14,700

10,000 5end 0.681 6810

Tax savings 15,000 1end 0.926 (13,890)

On Interest 12,000 2end 0.857 (10,284)

9,000 3end 0.794 (7146)

6,000 4end 0.735 (4,410)

3,000 5end 0.681 (2,043)

Tax savings

On Depreciation

(50,000 x 0.3) 1,00,000 1-5end 3.993 (1,19,790)

Salvage value 35,000 5end 0.681 (23,835)


PRAVINN MAHAJAN 9871255244, 8800684854

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Option 2 To acquire asset on lease

Company will be indifferent between loan option and lease option if Present value of cash

outflow in lease option is equal to present value of cash outflow in loan option

Present value of Cash outflow of lease option required = 3,43,812

Statement of Present value of cash outflow


@ 8%

Lease Rent x 1-5end 3.993 3.993x

Tax savings on

lease rent 0.3x 1-5end 3,993 (1.1979x)


3.993x - 1.1979x = 3,43,812

2.7951x = 3,43,812

x = 1,23,005

Lease rent p.a to make company indifferent between loan option and lease option is

Rs 1,23,005

Q5 Agrani ltd needs a machine costing Rs 40,00,000. Company has 2 options

Option 1 Acquire the Machine on Lease at an annual lease rent of Rs12,00,000

Lease Rent p.a Rs 12,00,000

Tax saving on lease rent 12,00,000 x 0.35 = 4,20,000

Statement of Present value of cash outflows

(if Asset is taken on lease)


@ 16%

Lease Rent 12,00,000 1 – 5 end 3.274 39,28,800

Tax Savings on

lease rent 4,20,000 1 – 5 end 3.274 13,75,080

Present Value of Cash outflow 25,53,720

PRAVINN MAHAJAN 9871255244, 8800684854

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Option 2 Purchase the asset by borrowing from bank

Amount of Loan = Rs 40,00,000 @ 20%

Loan is payable in 5 equal Installments. Amount of each installment is :

Amount x factor (5 yrs, 20%*) = 40,00,000

Amount x 2.991 = 40,00,000

Amount = 13,37,345


Year Installment Interest Principal Principal Tax saving

@ 20% Outstanding on intt @ 35%

1end 13,37,345 8,00,000 5,37,345 34,62,655 2,80,000

2end 13,37,345 6,92,531 6,44,814 28,17,841 2,42,386

3end 13,37,345 5,63,568 7,73,777 20,44,064 1,97,249

4end 13,37,345 4,08,813 9,28,532 11,15,532 1,43,085

5end 13,37,345 2,21,813 11,15,532 - 77,635 (13,37,345 – 11,15,532)

Depreciation @ 25% p.a WDV basis

Tax saving on dep @ 35%

Cost 40,00,000

Dep 1 year 10,00,000 3,50,000

30,00,000

Dep 2nd

yr 7,50,000 2,62,500

22,50,000

Dep 3rd

yr 5,62,500 1,96,875

16,87,500

Dep 4th yr 4,21,875 1,47,656

12,65,625

Dep 5th yr 3,16,406 1,10,742

WDV after 5 years 9,49,219

Salvage value after 5 yrs 8,00,000

Capital loss 1,49,219

Tax savings on cap loss 52,226 (1,49,219 x 0.35)

Net salvage value 8,00,000 + 52,226 = 8,52,226

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of Present value of cash outflow if Loan is taken from Bank

Amount Period factor Present

@ 16% value

Installment (Principal

+ interest) 13,37,345 1 – 5 end 3.274 43,78,468

Tax savings on

Interest and dep 6,30,000 1e 0.862 (5,43,060)

(2,80,000 + 3,50,000)

504,886 2e 0.743 (3,75,130)

(2,42,386 + 2,62,500)

3,94,124 3e (0.641) (2,52,633)

2,90,741 4e (0.552) (1,60,490)

1,88,377 5e (0.476) (89,667)

Salvage value 8,52,226 5e (0.476) (4,05,660)

25,51,828

Present value of Cash ouflow in loan option is lower than present value of cash outflow in lease

option, so company should purchase the asset by borrowing from Bank

b. Evaluation of Proposal from the point of view of lessor, If lessor’s cost of capital is 14%

Lessor will receive Lease rent and pay tax on such lease rent

Lessor will claim depreciation on asset and tax saving on such depreciation and will claim

salvage value

Cash outflow will be purchase price of machine.

Statement of NPV of Lessor @ 14%

Amount Period factor Present

@ 14% value

Present value of cash inflows

Lease rent (net of tax)

12,00,000 (1 – 0.35) 7,80,000 1 – 5e 3.433 26,77,740

Tax savings on Depreciation 3,50,000 1e 0.877 3,06,950

2,62,500 2e 0.769 2,01,863

1,96,875 3e 0.675 1,32,891

1,47,656 4e 0.592 87,412

1,10,742 5e 0.519 57,475

Salvage value 8,52,226 5e 0.519 4,42,305

Cash Inflows 39,06,636

Present value of cash outflows

Purchase price of machine 40,00,000 0 1 40,00,000

NPV (93,364)

Since NPV of lease is negative, so lessor should not lease the Asset

PRAVINN MAHAJAN 9871255244, 8800684854

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Q6 Company is considering to buy personal computer with modem and printer costing Rs 60,000.

Company has 2 options.

Option 1 To purchase the asset by borrowing from bank @ 12% p.a. Principal is to be

repaid in 5 equal investments


Year Principal Interest Tax saving on Interest

1 12,000 7,200 2,160

2 12,000 5760 1,728

3 12,000 4320 1,296

4 12,000 2,880 864

5 12,000 1,440 432

Statement of Depreciation on Asset

Full cost of the Asset is to be depreciated during the life

Depreciation p.a = 12,000

Tax savings on depreciation = 12,000 x 0.3 = 3,600

Statement of present value of cash outflows if asset is purchased

Particulars Amount Period P.V factor Present

@ 11% value

Principal Payment 12,000 1 – 5 end 3.696 44,352

Interest (net of

Tax saving

7,200 - 2,160 5,040 1e 0.901 4,541.04

4,032 2e 0.812 3,273.98

4,320 – 1,296 3,024 3e 0.731 2,210.54

2,016 4e 0.659 1,328.54

1,008 5e 0.593 597.74

Tax savings

On depreciation 3,600 1 – 5 3.696 (13,305.6)

Salvage value net of

tax on cap gain

(1500 – 120) –

0.3(1500 - 120) 966 5e 0.593 (572.84)

Present value of cash outflows 42,425.40

Computation of Annual Lease rentals

Present value of Annual lease rentals Rs 42,425.40

Lease rent p.a x 3.696 3.696x

Tax savings 0.3x 3.696 1.1088x

Present value of cash outflow 2.5872 x

2.5872x = 42,425.40

x = 16,398.19

PRAVINN MAHAJAN 9871255244, 8800684854

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Q7 Jags Ltd is contemplating to acquire a new truck. Company has two options

Option 1 To acquire the asset on lease on annual lease rent of Rs 1,20,000 p.a to be paid

at beginning at of each year

Discount rate is rate of Interest charged by bank after tax 10% (1 – 0.4) = 6%

Statement of present value of cash outflows if asset is taken on lease

Particulars Amount Period Factor Present

@ 6% value

Lease Rent 1,20,000 0 1 1,20,000

1,20,000 1 – 3 2.673 3,20,760

Tax saving on

lease rent 48,000 1 – 4e 3.465 (1,66,320)

Present value of cash outflows 2,74,440

Maintenance cost is not considered as it is incurred in lease and purchase option

Option 2 To purchase the asset for Rs 4,80,000 by borrowing from bank @ 10%

Loan is to be paid in 4 equal installments. Amount of each installment is

Amount x factor @ 10% = 4,80,000

Amount x 3.170 = 4,80,000

Amount = 1,51,420


Year Installment Interest Principal Principal tax

outstanding saving @40%

1 1,51,420 48,000 1,03,420 3,76,580 19,200

2 1,51,420 37,658 1,13,762 2,62,818 15,063

3 1,51,420 26,282 1,25,138 1,37,500 10,513

4 1,51,420 13,920 1,37,500 - 5,568

Statement of depreciation

Year Depreciation Tax saving on Depreciation

1 33% 1,58,400 63,360

2 45% 2,16,000 86,400

3 15% 72,000 28,800

4 7% 33,600 13,440

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of Present value of cash outflow if asset is purchased

Particulars Amount period factor Present

@ 6% value

Installment 1,51,420 1 – 4e 3.465 5,24,670

Tax saving on

Interest & depreciation 82,560 1e 0.943 (77,854)

1,01,463 2e 0.890 (92,302)

39,313 3e 0.840 (33,023)

19,008 4e 0.792 (15,054)

Salvage value

1,20,000 –

0.4 x 1,20,000 72,000 4e 0.792 (57,024)

Present value of cash outflows 2,49,413

Maintenance cost is not considered as it is incurred in lease and purchase option

Since present value of cash outflow is lower in case of loan option so company should purchase

the asset by borrowing from bank

Q8 Highlighted line is missing in question in assignment

Zapak Ltd is faced with the decision to purchase or acquire on lease a mini car. The cost of mini

car is Rs 1,26,965. It has a life of 5 years. The mini car can be obtained on lease by paying equal

lease rentals annually. The leasing company desires a return of 10% on the gross value of the

asset. Company can also obtain 100% finance from its regular banking channel. The rate of

interest will be 15% p.a and the loan will be paid in 5 equal annual installments, inclusive of

interest. The effective tax rate of company is 40%. For the purpose of taxation it is to be assumed

that the asset will be written of over a period of 5 years on a straight line basis.

Lease rents are paid at beginning of each year

Advise the company about the method of acquiring the car.

What should be the annual lease rental to be charged by the leasing company to match

the loan option (M96)

Sol Zapak Ltd is considering to purchase a Mini car costing Rs 1,26,965. Company has two options

Option 1 to acquire the asset on lease, by paying equal annual lease rent for 5 years

At beginning of each year

Amount of Lease rent p.a shall be the amount which yields 10% return for Lessor. Thus from

point of view of lessor Present value all cash inflows should be equal to cost of assets.

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of present value of cash inflow from point of view of lessor

Particulars Amount Period factor Present

Lease rent x 0 1 x

x 1-4 3.170 3.170x

Tax on lease rent 0.4x 1 – 5 3.791 (1.5164x)

Tax saving on

Depreciation 10,157 1 – 5 3.791 38,505

( )0.4

Present value of all cash inflows 1,26,965

4.170x – 1.5164x + 38,505 = 1,26,965

2.6536x = 88,460

x = 33,335

Statement of present value of cash outflow if asset is acquired on lease (point of view of lessee)

Particulars Amount Period factor Present

@ 9% Value

Lease rent 33,335 0 1 33,335

33,335 1-4 3.240 1,08,005

Tax saving on

Lease rent 13,334 1 – 5e 3.890 (51,869)

Present value of Cash outflow 89,741

Option 2 To purchase the asset by borrowing from bank Rs 1,26,965 @ 15% to be paid in 5 equal

installments (it is assumed that installments of loan are payable at end of each year)

Amount of each installment should be such that present value of all installments @ 15%

is equal to cost of the asset.

Amount x factor @ 15% = 1,26,965

Amount x 3.352 = 1,26,965

Amount = 37,877

Statement of Principal and interest

Year installment interest Principal Principal o/s tax saving on

interest

1 37,877 19,045 18,832 1,08,133 7618

2 37,877 16,220 21,657 86,476 6488

3 37,877 12,971 24,906 61,570 5188

4 37,877 9236 28,641 32,929 3694

5 37,877 4948 32,929 - 1979

PRAVINN MAHAJAN 9871255244, 8800684854

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Statement of present value of cash outflow

Amount Period factor@ 9% Present value

Installment 37,877 1 – 5 3.890 1,47,342

Tax saving on intt 7618 1e 0.917 (6986)

6488 2e 0.842 (5463)

5188 3e 0.772 (4005)

3694 4e 0.708 (2615)

1979 5e 0.650 (1286)

Tax saving on depn 10,157 1 – 5 3.890 (39,511)

Present value of cash outflow 87,476

Since present value of cash outflow in case of purchase option is lower than present value of

cash outflow in case of lease option, so company should purchase the asset.

b. Annual lease rent if lease option is to be matched with loan option

Present value of cash outflow in lease option = Present value of cash outflow in loan

option

4.240 x – 3.890 (0.4x) = 87,746

4.240 x - 1.556 x = 87,746

2.684 x = 87,746

x = 32,692

if annual lease rent is Rs 32,692, company will be indifferent between loan option and lease

option

Q9a. i. flying hours required to make renting aircraft viable option will be the hours in which

Present value of contribution from the flying hours during the life of aircraft is equal to

present value of cash outflow during the life of aircraft

Statement of Net present value of cash inflow if rented

Amount period factor(10%) Present value

Cash inflows

Annual contribution

(if annual flying hrs is x)

(Contribution per hr – VC / hr) no of

hrs p.a

( – 36,100) x 30,567x 1 – 5 3.791 1,15,879x

Cash outflows

Fixed costs (Rent) 2,50,00,000 0 1 2,50,00,000

2,50,00,000 1-4 3.17 792,50,000

Net present value of cash inflow 0

No of flying hours to make renting viable option is

1,15,879x - 1042,50,000 = 0

x =

x = 900 hours

PRAVINN MAHAJAN 9871255244, 8800684854

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ii. flying hours required to make buying aircraft viable option will be the hours in which

Present value of contribution from the flying hours during the life of aircraft is equal to

present value of cash outflow during the life of aircraft

Statement of Present value of cash inflow if purchased

Amount Period factor (10%) Present value

Cash inflows

Annual contribution 66,667x 1 – 5 3.791 2,52,735x

Cash outflows

Cost of Aircraft 20,00,00,000 0 1 20,00,00,000

Overhaul cost 6,00,00,000 3e 0.751 4,50,60,000

Annual fixed operating cost 1,00,00,000 1 – 5 3.791 3,79,10,000

Net present value of cash inflows 0

No of flying hours to make renting viable option is

2,52,735x - 2829,70,000 = 0

x =

x = 1120 hours per year

b. Company will be indifferent between buying and renting, NPV of renting an aircraft is equal to

NPV of Renting an aircraft

NPV of renting = NPV of Buying an aircraft

115879x - 1042,50,000 = 252735x - 2829,70,000

2829,70,000 – 1042,50,000 = 252735x – 115879x

x = 1306 hours

if annual flying hrs are

0 – 900 = it is not viable to acquire a plane either by renting or buying

.> 900 < 1306 = it is better to rent the plane

1306 = either rent or buy

> 1306 = Buy the aircraft

c. if purchased, each aircraft flies for 2,400 hours per year

To make 5,750 flying hours per year, company will purchased 2 planes which will fly for 4,800 hrs

p.a and for balance 950 hours (5,750 – 4800), it will be better to rent an aircraft (as for flying

hours between 900 to 1306 buying an aircraft is not a viable option)

Q10 Armada company is a leasing company and is considering to lease a school bus at an annual

lease rent of 1,25,000 p.a for 8 years. Cost of bus is Rs 5,00,000

a. IRR is the rate at which present value of cash inflow is equal to present value of cash outflow

i.e PV of cash inflow = 5,00,000

Present value of cash inflows @ 15%(Random) = 1,25,000 x 4.487 = Rs 5,60,875

Present value of cash inflows @ 20% = 1,25,000 x 3.837 = Rs 4,79,625

IRR = 15 + x 5

= 18.746%

At 15% ……. 5,60,875

At ? ………5,00,000

At 20% ……. 4,79,625

For diff in PV of 81,250, diff in rate is

5%. For diff in PV of 60,875, diff in

rate is

x 5 + 15

PRAVINN MAHAJAN 9871255244, 8800684854

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b. Company will earn 20% return p.a on its investment if Present value of annual lease rent for 8

years is equal to cost of asset

Annual lease rent x facto @ 20% = Cost of asset

Lease rent x 3.837 = 5,00,000

Annual lease rent = Rs 1,30,310 p.a

C Company will earn 20% return p.a on its investment if Present value of annual cash inflows

for 8 years is equal to cost of asset

Statement of Net present value of cash inflows (of lessor)

Amount Period factor @ 20% Present value

Lease rent x 1 – 8 e 3.837 3.837x

Tax on lease rent 0.4x 1 – 8 e 3.837 (1.5348x)

Annual expenses

After tax savings 50,000(1 – 0.4) 1 - 8e 3.837 (1,15,110)

Ta savings on

Depreciation 20,000 1 – 8e 3.837 76,740

0.4( )

Salvage value 1,00,000 8e 0.233 23,300

Present value of cash inflow 5,00,000

Annual lease rent to earn 20% rate of return

2.3022x - 15,070 = 5,00,000

X =

Annual lease rent = 2,23,730

PRAVINN MAHAJAN 9871255244, 8800684854

18

Q11 Elite Builders will build 6 flats and lease them to foreign embassy for 15 years. Foreign embassy

will provide land to Elite builders, costing Rs 25 lakhs

i. Lease rent per annum for lessor to earn minimum desired return of 10% (if rentals and

repairs will arise on the last day of the year and construction , registration and other costs

are to be incurred at time 0) Lessor will earn 10% if present value of cash inflows (lease rent) – Present value of cash

outflow = 0

Or present value of cash inflows (lease rent) = Present value of cash outflow

Statement of Net present value of cash inflows

Cash inflows

Lease rent x (1 – 0.5) = 0.5x 1 – 5e 3.791 1.8955x

(after tax) 1.20(1 – 0.5) = 0.60x 6 – 10e 3.791 x 0.621 1.4125x

1.50(1 – 0.5) = 0.75x 11 – 15e 3.791 x 0.386 1.09749x

Cash outflows

Construction cost

+ registration cost

(6 x 1000 x 400)

+ 2.5% of 24lacs 24,60,000 0 1 (24,60,000)

Repairs (net of tax)

4,00,000 ( 1 -0.5) 2,00,000 14e 0.263 (52,600)

2,00,000 15e 0.239 (47,800)

Tax saving on depn

x 0.50 82,000 1 – 15 7.606 6,23,692

Salvage value

(8,00,000 – 0.5 x 8 lac) 4,00,000 15e 0.239 95,600

Net present value 0

Normal lease rent is

4.40549 x - 18,41,108 = 0

x =

normal rent = 4,17,912 for 6 flats

= = Rs 69,652

PRAVINN MAHAJAN 9871255244, 8800684854

19

Q12 ABC Ltd is contemplating to acquire computer. Company has two options

Option 1 To Acquire computer at annual lease rent of Rs 85,000 + 5% of annual billings

Annual lease rent

Year 1 85,000 + 5% x 2,20,000 = 96,000

Year 2 85,000 + 5% x 2,60,000 = 98,000

Year 3 85,000 + 5% x 2,60,000 = 98,000


Lease rent

(after tax) 96,000(1 – 0.5)= 48,000 1e 0.893 42,864

98,000( 1 – 0.5)= 49,000 2e 0.797 39,053

98,000( 1 – 0.5)= 49,000 3e 0.712 34,888


Option 2 To purchase the computer by borrowing Rs 2,30,000 from bank @ 16% p.a


Repayment of loan

(interest after tax p.a

+ principal in 3rd

year) 36,800(1 – 0.5)

18,400 1e 0.893 16,431

18,400 2e 0.797 14,665

2,30,000 + 18,400 3e 0.712 1,76,861

Maintenance, taxes

Insurance (after tax) 20,000( 1 – 0.5) 1 – 3e 2.402 24,020

Tax savings on depreciation

( )x 0.5 20,000 1 – 3e 2.402 (48,040)

Salvage value 1,10,000 3e 0.712 (78,320)


Annual operating expenses of Rs 80,000 is ignored, as it is to be incurred in both lease

and purchase option

Since Present value of cash outflow is lower in case of purchase option, So company should

purchase the computer

PRAVINN MAHAJAN 9871255244, 8800684854

20

Evaluation of proposal from point of view of lessor

Lessor will purchase the asset for Rs 2,30,000 and incur maintenance, taxes and insurance

Lessor will claim depreciation and receive salvage value after life

Annual operating expenses Rs 80,000 are to be incurred by lessee

Statement of Net Present value of cash inflows

Cash inflows

Lease rent

(after tax) 96,000(1 – 0.5)= 48,000 1e 0.893 42,864

98,000( 1 – 0.5)= 49,000 2e 0.797 39,053

98,000( 1 – 0.5)= 49,000 3e 0.712 34,888

1,16,805

Cash outflows

Purchase Price 2,30,000 0 1 2,30,000

Maintenance, taxes

Insurance (after tax) 20,000( 1 – 0.5) 1 – 3e 2.402 24,020

Tax savings on

depreciation

( )x 0.5 20,000 1 – 3e 2.402 (48,040)

Salvage value 1,10,000 3e 0.712 (78,320)

Cash outflows 1,27,660

NPV (1,16,805 - 1,27,660) (10,855)

Since NPV of lease proposal is –ve, so it is not viable for lessor

Q13 IRR of leasing company is the rate at which present value of cash inflows are equal to present

value of cash outflows

Cash outflows are purchase price of bus i.e Rs 16,00,000

Cash inflows are Lease rent of Rs 4,00,000 for 8 years

Tax rate no given so depreciation is ignored. Salvage value not given

Present value of cash inflows @ 18% (random) = 4,00,000 x 4.078 = 16,31,200

Present value of cash outflows @ 19% = 4,00,000 x 3.954 = 15,81,600

IRR is = 18 + x 1

= 18.629%

18%........ 16,31,200

? 16,00,000

19%........ 15,81,600

For change in PV of 49,600, change in

rate is 1%. For change in PV of

31,200 change in rate is

x 1

PRAVINN MAHAJAN 9871255244, 8800684854

21

ii. Annual lease rent to earn 20% compound interest

Lease rent x factor (20% , 8yrs) = 16,00,000

Rent x 3.837 = 16,00,000

Rent = 4,16,992

Q14 Cash outflow Rs 100 lakh

Lease period 5 years

Required rate 20%

i. Lease rent p.a for equated level

( Equated level is the rent at which present value of annual lease rent is equal to cash

outflow)

Lease rent x factor (5yrs, 20%) = 100 lac

Rent x 2.991 = 100 lac

Annual lease rent = 33.434 lac p.a

ii. Stepped lease rent i.e Lease rent if it increases 15% p.a

Present value of stepped lease rent for 5 years is equal to cost of asset)

Let lease rent of 1st year is x

+ + + + = 100 lac

0.833x + 0.694 + 0.578 + 0.482 + 0.402 = 100 lac

x = 26,08,923

iii. Annual lease rent of 10 lac for 4 years and balloon payment in 5th year. Amount of

payment in 5th year

Present value of + P.V of lease = 100 lac

Rs 10,00,000 for 4 years rent for 5th year

10,00,000 x 2.589 + 0.402 x = 100 lac

x = = Rs 184.35 lac

iv. Annual lease rent if rent is paid after 2 years from 3rd

year for 3 years

Annual lease rent x (factor 3 years 20%)(factor 2nd

year, 20%) = 100 lacs

Lease rent x 2.106 x 0.694 = 100 lacs

Lease rent p.a =

Rs 68.419 lacs p.a

PRAVINN MAHAJAN 9871255244, 8800684854

22

Q15 Alternative 1 Purchase option

Depriciation - 22,00,000 – 10,00,000 = Rs 4,00,000 p.a

3

Operating and training costs are common in both alternatives, hence not relevant

Effective discount rate 16% (1. 0.5) = 8%

Statement of cash flows under purchase option

Particulars Year 1 Year 2 Year 3

Principal 5,00,000 8,50,000 8,50,000

Interest 3,52,000 2,72,000 1,36,000

Tax saving on Interest 1,76,000 1,36,000 68,000

Depreciation 4,00,000 4,00,000 4,00,000

Tax saving on depreciation 2,00,000 2,00,000 2,00,000

Salvage value 10,00,000

Statement of NPV under purchase option

Particulars period Amount Factor @ 8% Present value

Installment and interest 1end 8,52,000 0.926 7,88,952

Payment 2end 11,22,000 0.857 9,61,554

3end 9,86,000 0.794 7,82,884

Tax saving on depreciation 1end 3,76,000 0.926 (3,48,176)

And Interest 2 end 3,36,000 0.857 (2,87,952)

3 end 2,68,000 0.794 (2,12,792)

Salvage value 3 end 10,00,000 0.794 (7,94,000)

NPV of cash flows 8,90,470_

Alternative 2- Lease option

Statement of lease rent

Particulars Year 1 Year 2 Year 3

Lease rent 5,00,000 5,00,000 5,00,000

10 % of revenue 2,25,000 2,50,000 2,75,000

Lump sum payment 6,00,000

7,25,000 7,50,000 13,75,000

Statement of NPV under Lease option

Particulars period Amount Factor @ 8% Present value

Lease rent 1 end 7,25,000 0.926 6,71,350

2end 7,50,000 0.857 6,42,750

3 end 13,75,000 0.794 10,91,750

Tax savings on lease rent 1 end 3,62,500 0.926 (3,35,675)

2 end 3,75,000 0.857 (3,21,375)

3 end 6,87,500 0.794 (5,45,875)

NPV of cash flows 12,02,925

Since NPV is lower in purchase option, so company should purchase the computer

PRAVINN MAHAJAN 9871255244, 8800684854

23

Q16 Classic finance will lease a machine to customer for 3 years at lease rent which for 3 years will be

in the ratio of 3:2:1.

Statement of Depreciation and tax saving on depreciation (in lacs)

Year Book value Depreciation Cl WDV Tax saving

At beg of year of the year(25%)

1 600 150 450 52.50

2 450 112.5 337.5 39.375

3 337.5 84.375 253.125 29.531

Salvage value after 3 years nil

Capital loss after 3 years 253.125

Tax saving on capital loss 88.59 lacs

Statement of lease rent

Let lease rent of 3rd

year is x

Year Lease rent Lease rent after tax

1 3x 3x ( 1 – 0.35) = 1.95x

2 2x 2x ( 1 – 0.35) = 1.30x

3 x x ( 1 - 0.35) = 0.65x

Lessor will earn 10% if PV of cash inflows @ 10% - Present value of cash outflows = 0

Statement of net present value of cash inflows

Amount period factor Present value

Lease Rent (Net of tax) 1.95x 1e 0.909 1.77255 x

1.30x 2e 0.826 1.0738 x

0.65x 3e 0.751 0.48815x

Tax savings on depn 52.5 1e 0.909 47.7225

39.375 2e 0.826 32.52375

29.531 3e 0.751 22.17778

Tax savings on cap loss 88.59 3e 0.751 66.5339

Purchase Price 600 0 1 (600)

NPV 0

3.3345x - 431.042 = 0

X = = 129.267 lacs

Lease rent of 3rd

year = 129.267 lacs

Lease rent of 2nd

year = 258.534 lacs

Lease rent of 1st year = 387.801 lacs

PRAVINN MAHAJAN 9871255244, 8800684854

24

Q17 Company X is considering to acquire a machine costing Rs 10 lakhs. Company has 2 options

Option 1 To acquire machine on hire purchase (just like loan option)

Company X will pay 2,50,000 at the time of signing of agreement and annual

installment of Rs 4,00,000 at the end of each year for 3 years. Rate of interest

paid by company X is the rate at which present value of cash outflow is equal to

loan (10,00,000 – 2,50,000) 7,50,000

Computation of rate of Interest paid by company X

Present value of 4,00,000 p.a for 3 years @ 27% 7,58,400

Present value of 4,00,000 p.a for 3 years @ 28% 7,47,200

ROI paid is

27% + x 1

= 27.75%


Period Installment Interest Principal Principal o/s Tax saving on Intt

@ 27.75%

0 2,50,000 - 2,50,000 7,50,000 -

1e 4,00,000 2,08,125 1,91,875 5,58,125 72,844

2e 4,00,000 1,53,484 2,46,516 3,11,609 53,719

3e 4,00,000 88,391 3,11,609 - 30,937

Discount rate is rate of interest charged by Hire purchase company after tax 27.75 (1 – 0.35)

18.0375%

Statement of Present value of cash outflow (if taken on hire purchase)


@ 18.0375%

Installment 2,50,000 0 1 2,50,000

4,00,000 1 – 3e 2.173 8,69,200

Tax savings on intt 72,844 1e 0.847 (61,699)

53,719 2e 0.718 (38,570)

30,937 3e 0.608 (18,810)

Tax savings on 1,16,667 1 – 3e 2.173 (2,53,517)

depn

x 0.35


27%.............758400

?...................7,50,000

28%..............7,47,200

For PV of 11,200 change in rate is

1%. For change in PV of 8,400

change in rate is

x 1 = 0.75

PRAVINN MAHAJAN 9871255244, 8800684854

25

Statement of Present value of cash outflow (if asset is taken on lease)


@ 18.0375%

Initial service fee 20,000 0 1 20,000

Tax savings on

this fee at

1st yr end

(20,000 x 0.35) 7,000 1e 0.847 (5,929)

Lease rent

after tax

( 4,32,000 x 0.65) 2,80,800 1 – 3e 2.173 6,10,178


Since present value of cash outflow is lower in case of lease option so, lease option is

better.

Q18 An industrial unit desires to acquire a diesel generating set costing Rs 20 lakhs having a life of 10

years. Company has 2 options

Option 1 To acquire machine on lease at an annual lease rent which gives lessor a return

of 10%

Statement of NPV for lessor

Lessor will earn 10% if PV of cash inflows is equal to present value of cash outflows at 10% i.e

NPV = 0

Amount Period factor@ 10% Present value

Lease rent x 0 1 x

After tax x 1 – 9 5.759 5.759x

x( 1 – 0.5)

Tax on Lease rent 0.5x 1 – 10 6.145 (3.0725x)

Tax saving on depn

x 0.5 1,00,000 1 – 10 6.145 6,14,500

Purchase price 20,00,000 0 1 (20,00,000)

NPV 0

Annual lease rent

3.6865x - 13,85,500 = 0

x = = 3,75,831

PRAVINN MAHAJAN 9871255244, 8800684854

26

Statement of Present value of cash inflows for lessee

Amount Period factor @8% Present value

16(1 – 0.5)

Lease rent 3,75,831 0 1 3,75,831

3,75,831 1 – 9 6.247 23,47,816

Tax saving on 1,87,916 1 – 10 6.71 (12,60,916)

lease rent


Option 2 To purchase the asset by taking loan from bank @ 16% p.a, repayable in 10

equal installments

Installment of loan each year

Amount x factor @ 16% = 20,00,000

Amount x ( 1 + 4.607) = 20,00,000

Amount = 3,56,697


Year installment interest principal principal o/s Tax saving on intt

1 3,56,697 - 3,56,697 16,43,303 -

2 3,56,697 2,62,928 93,769 15,49,534 1,31,464

3 3,56,697 2,47,925 1,08,771 14,40,762 1,23,962

4 3,56,697 2,30,522 1,26,175 13,14,587 1,15,261

5 3,56,697 2,10,334 1,46,363 11,68,224 1,05,167

6 3,56,697 1,86,916 1,69,781 9,98,443 93,458

7 3,56,697 1,59,751 1,96,946 8,01,497 79,876

8 3,56,697 1,28,240 2,28,457 5,73,040 64,120

9 3,56,697 91,686 2,65,011 3,08,029 45,843

10 3,56,697 48,668 3,08,029 - 24,334

Statement of present value of cash outflow if asset is purchased

Amount Period factor Present value

@ 8%

Installment 3,56,697 0 1 3,56,697

3,56,697 1 – 9 6.245 22,27,573

Tax saving on intt 1,31,464 1e 0.926 (1,21,736)

1,23,962 2e 0.857 (1,06,235)

1,15,261 3e 0.794 (91,517)

1,05,167 4e 0.735 (77,298)

93,458 5e o.681 (63,645)

79,876 6e 0.630 (50,322)

64,120 7e 0.583 (37,382)

45,843 8e 0.540 (24,755)

24,334 9e 0.500 (12,167)

Tax saving on depn 1,00,000 1 – 10e 6.71 (6,71,000)


Purchasing the asset is better option

PRAVINN MAHAJAN 9871255244, 8800684854

27

Q19 Alfa Ltd. Is thinking of installing a computer. Company has two options.

Option 1 To acquire computer on lease at annual lease rent of Rs 4,50,000 to be paid at

beg of each year

Annual maintenance expenses are ignored as such expenses are incurred

whether asset is taken on lease or purchase by loan

Statement of present value of cash outflow


@ 9%

Lease rent 4,50,000 0 1 4,50,000

4,50,000 1 – 5 3.890 17,50,500

Tax saving on 1,80,000 1 – 6 4.486 (8,07,480)

lease rent


Option 2 To purchase the asset by borrowing from bank Rs 20,00,000 @ 15% p.a.

Loan is repayable by making 6 year end installments of Rs 5,28,474 each


Year installment interest principal principal o/s tax saving

1 5,28,474 3,00,000 2,28,474 17,71,526 1,20,000

2 5,28,474 2,65,729 2,62,745 15,08,781 1,06,292

3 5,28,474 2,26,317 3,02,157 12,06,624 90,527

4 5,28,474 1,80,994 3,47,480 8,59,144 72,398

5 5,28,474 1,28,872 3,99,602 4,59,542 51549

6 5,28,474 68,932 4,59,642 - 27,573

Depreciation p.a = 3,00,000

Tax saving on depreciation = 3,00,000 x 0.4 = 1,20,000



@ 9%

Installment 5,28,474 1 – 6 4.486 23,70,734

Tax saving on 2,40,000 1e 0.917 (2.20.080)

Interest + depn

2,26,292 2e 0.842 (1,90,538)

2,10,527 3e 0.772 (1,62,527)

1,92,398 4e 0.708 (1,36,218)

1,71,549 5e 0.650 (1,11,507)

1,47,573 6e 0.596 (87,954)

Salvage value 2,00,000 6e 0.596 (1,19,200)


Purchase option is better

Annual maintenance expenses are ignored as such expenses are incurred whether asset is taken on

lease or purchase by loan

PRAVINN MAHAJAN 9871255244, 8800684854

28

Q20 ITC finance is a leasing company, considering to lease a machine costing Rs 30 lac.

Discount rate 12%

Depreciation p.a = 6,00,000

Lease period 5 years

Rent to be received at beginning of each year

Amount of Annual lease rent will be the amount at which PV of cash inflows are equal to present

value of cash outflows i.e NPV = 0



12%

Lease rent x 0 1 x

x 1 – 4 3.037 3.037x

Tax paid on lease rent 0.5x 1 – 5 3.605 (1.8025x)

Tax saving on depn 3,00,000 1 – 5 3.605 10.81,500

Purchase price 30,00,000 0 1 (30,00,000)

NPV 0

Annual lease rent

2.2345x - 19,18,500 = 0

x = 8,58,581

Q21 MGF is a leasing company, which is considering to lease an equipment costing Rs 10,00,000 for

10 years

Depreciation p.a = 1,00,000 p.a

Tax rate 40% for 5 years and 30% for next 5 years

1% management fee charged from lessee is to be ignored as it is equal to overhead cost incurred

Lease rents are to be collected at beginning of each year




Amount period factor@ 10% Present value

Lease rent x 0 1 x

x 1 – 9 5.759 5.759x

Tax paid on 0.4x 1 – 5 3.791 (1.5164x)

lease rent 0.3x 6 – 10 3.791 x 0.621 (0.7063x)

Tax saving on 40,000 1 – 5 3.791 1,51,640

Depn 30,000 6 – 10 3.791 x 0.621 70,626

Purchase price 10,00,000 0 1 (10,00,000)

NPV 0

Annual lease rent

4.5363x - 7,77,734 = 0

x = 1,71,447

PRAVINN MAHAJAN 9871255244, 8800684854

29

Q22 ITC Finance Ltd.a leasing company is considering to lease a machine costing 3,00,000 + 30,000

For 5 years

Tax rate 50%

Discount rate 8%

Statement of depreciation

Year op.WDV Depreciation Cl. WDV Tax saving

On Depn

1 3,30,000 82,500 2,47,500 41,250

2 2,47,500 61,875 1,85,625 30,937

3 1,85,625 46,406 1,39,219 23,203

4 1,39,219 34.805 1,04,414 17,402

5 1,04,414 26,104 78,310 13,052

Salvage value assumed Nil

Tax saving on Capital loss 78,310 x 0.5 = 39,155





Lease rent x 1 - 5 3.993 3.993x

Tax paid on

lease rent 0.5x 1 – 5 3.993 (1.9965x)

Tax saving on

Depn 41250 1e 0.926 38,198

30937 2e 0.857 26,513

23203 3e 0.794 18423

17402 4e 0.735 12790

13052 5e 0.681 8888

Salvage value 39,155 5e 0.681 26,665

Purchase price 3,30,000 0 1 (3,30,000)

NPV 0

Annual lease rent

1.9965x - 1,98,523 = 0

x = 99,436

PRAVINN MAHAJAN 9871255244, 8800684854

30

Q23 A leasing company, which is considering to lease an equipment costing Rs 1,00,000 for 5 years

Salvage value Rs 10,000

i. Lease rents are to be collected at end of each year





Lease rent x 1 – 5 3.791 3.791x

Salvage value

To be discounted

at 25% 10,000 5e 0.328 3,280

Purchase price 10,00,000 0 1 (1,00,000)

NPV 0

Annual lease rent

3.791x - 96,720 = 0

x = 25,513

ii. Lease rent are payable at beg of each year





Lease rent x 0 1 x

x 1 - 4 3.170 3.170x

Salvage value

To be discounted

at 25% 10,000 5e 0.328 3,280

Purchase price 10,00,000 0 1 (1,00,000)

NPV 0

Annual lease rent

4.170x - 96,720 = 0

x = 23,194

PRAVINN MAHAJAN 9871255244, 8800684854

31

Q24 Lessee has received 2 offers from leasing company for leasing the asset costing Rs 1,50,000

Option 1 Pay lease rentals for 96 months. Rs 30 / 1000 for 1st 72 months and Rs 5 / 1000

for next 24 months.

Lessor offered to transfer asset to lessee at 5% of original cost after expiry of

lease

(Tax saving on lease rent will be at the end of each year)

Payment of monthly lease rent

Year 1 – 6 (Month 1 – 72) = 1,50,000 x = Rs 4500 pm

Year 7 – 8 (Month 73 – 96) = 1,50,000 x = Rs 750 pm

Yearly lease rent

Year 1 – 6 = 4500 x 12 = 54,000 p.a

7 – 8 = 750 x 12 = 9,000 p.a

On Lease rent discount rate applicable is yearly discount rate calculated on Monthly average

basis

Sum of PV factor for 1 – 72 months =

( 0.923 + 0.795 + 0.685 + 0.590 + 0.509 + 0.438) = 3.940

Sum of PV factor for 73 – 96 months

(0.377 + 0.325) = 0.702

Tax saving on lease rent

Year ( 1 – 6) = 54,000 x 0.4 = 21,600

Factor (0.869 + 0.756 + 0.658 + 0.572 + 0.497 + 0.432) = 3.784

Year (7 – 8) = 9,000 x 0.4 = 3600

Factor ( 0.376 + 0.327_ = 0.703



Lease rent 54,000 1 – 6 3.940 2,12,760

9.000 7 – 8 0.702 6,318

Tax saving on rent 21,600 1 – 6 3.784 (81,734)

3600 7 – 8 0.703 (2531)

1,34,813

There is no detailed information about the future life of asset. So it is assumed that the company

did not purchase the asset as offered by the leasing company.

PRAVINN MAHAJAN 9871255244, 8800684854

32

Option 2

Lease rent is to be paid @ Rs 35 / 1000 for 60 months

Initial deposit of 15% is to be paid at the time of agreement

After expiry of lease, asset will be sold to lessee against initial deposit. Further life of asset is 3

years. Thus total life of asset is 5 + 3 = 8 years

Monthly lease rent = 1,50,000 x = Rs 5,250 pm

Annual rent = 5,250 x 12 = Rs 63,000

Discounted at ( 0.923 + 0.795 + 0.685 + 0.590 + 0.509) = 3.502

Yearly rate on monthly average basis

Tax saving on lease rent = 63,000 x 0.4 = 25,200 p.a

Discounted at yearly rate (0.869 + 0.756 + 0.658 + 0.572 + 0.497)= 3.352

At the beginning of lease initial deposit of 15% i.e 22,500 is to be paid. It will be adjusted and the

asset is given to lessee at the end of year 5. Lessee becomes the owner of asset and claim tax

saving on depreciation. He also receives salvage net of tax

Statement of depreciation and tax saving

Year WDV Dep tax saving @ 40%

6 22,500 5,625 2,250

7 16,875 4219 1688

8 12,656 3164 1266

Cl WDV 9492 (assumed asset sold at 9492 after life)



Initial deposit 22,500 0 1 22,500

Lease rent 63,000 1 – 60 month 3.502 2,20,626

Tax saving on rent 25,200 1 – 5 yr 3.352 (84,470)

Tax saving on dep 2250 6e 0.432 (972)

1688 7e 0.376 (635)

1266 8e 0.327 (414)

Salvage value 9492 8e 0.327 (3104)

NPV 1,53,531

leasing solution ca-final sfm (full)

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