Leasing Solution Ca-Final SFM (Full)

PRAVINN MAHAJAN 9871255244, 8800684854
LEASING
Q1
Sunderam ltd.Is contemplating to acquire machine worth Rs 10,00,000. Company has 2 options
1
2
To lease the asset at annual lease rentals of Rs 3,34,000 for 5 years.

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
Tax savings on Lease Rent
3,34,000 (0.35)
Rs 3,34,000
Rs 1,16,900
Statement of Present Value of Cash Outflow

Amount
Lease Rent
Tax saving
Option 2
Period
Factor
@ 16%
3.274
3.274
3,34,000
1-5
1,16,900
1-5
Net cash outlow
Present
Value
10,93,516
(3,82,731)
7,10,785
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
Payment of Principal
2,00,000
Interest @ 15%
1,50,000
Tax savings on interest
52,500
Depriciation
1,50,000
Book value after 5 years 4,43,705
Tax savings on Depreciation
52500
Salvage value nil
2
2,00,000
1,20,000
42,000
1,27,500
3
2,00,000
90,000
31,500
1,08,375
4
2,00,000
60,000
21,000
92,119
44625
37,931
32,242
5
2,00,000
30,000
10,500
78,301
27,405
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of Present value on cash outflows

Amount
2,00,000
Period
1-5
Factor@16%
3.274
Present value
6,54,800
Interest
1,50,000
1,20,000
90,000
60,000
30,000
1end
2end
3end
4end
5end
0.862
0.743
0.641
0.552
0.476
1,29,300
89,160
57,690
33,120
14,280
Tax savings on Intt
52,500
42,000
31,500
21,000
10,500
1end
2end
3end
4end
5end
0.862
0.743
0.641
0.552
0.476
(45,255)
(31,206)
(20,192)
(11,592)
(4998)
Tax savings on Dep
52500
44,625
37,931
32,242
27,405
1end
2end
3end
4end
5end
0.862
0.743
0.641
0.552
0.476
(45,255)
(33,156)
(24,314)
(17,798)
(13,045)
1,55,297
5end
0.476
(73,921)
Principal
Salvage value
Scrap value
nil
Tax savings on
cap loss
(0 4,43,705)x 0.35
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
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
Tax savings on Lease rent
(1,25,000 x 0.4)
Rs 1,25,000
Rs 50,000
Statement of present value of cash outflow in case of Lease option

Amount
Period
Factor
Present value
@10%
Lease Rent
Tax savings on
lease rent
Option 2
1,25,000
1,25,000
0
1-4beg
1
3.170
1,25,000
3,96,250
50,000
1-5end
Present value of Cash outflow
3.791
(1,89,550)
3,31,700
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
1end
2end
3end
4end
5end
Principal p.a
Interest
1,50,000 (30%)
1,25,000 (25%)
1,00,000 (20%)
75,000 (15%)
50,000
(10%)
60,000
42,000
27,000
15,000
6,000
Tax saving on
Interest @ 40%
24,000
16,800
10,800
6,000
2400
Installment of loan and interest is payable to bank at the end of each year
Depreciation p.a on SLM basis
Tax saving on depreciation
5,00,000 x 0.2
1,00,000 x 0.4
1,00,000
40,000
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of Present value of cash outflow if asset is purchased

Particulars
Installment
(Principal +
Interest)
Tax savings on
Interest
Tax savings on
Depreciation
Amount
Period
Factor@ 10%
Present
Value
2,10,000
1,67,000
1,27,000
90,000
56,000
1end
2end
3end
4end
5end
0.909
0.826
0.751
0.683
0621
1,90,890
1,37,942
95,377
61,470
34,776
24,000
16,800
10,800
6,000
2,400
1end
2end
3end
4end
5end
0.909
0.826
0.751
0.683
0.621
(21,816)
(13,877)
(8,111)
(4098)
(1,490)
3.791
(1,51,640)
3,19,423
40,000
1-5end
Net cash outflow
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
Lease Rent
Tax saving on
lease rent
Amount
Period
Factor @ 5%
55,000
55,000
0
1-9
1
7.108
27,500
1-10
7.722
Present value of Cash out flow
Present
Value
55,000
3,90,940
(2,12,355)
2,33,585
PRAVINN MAHAJAN 9871255244, 8800684854
Option 2
Purchase the Asset by borrowing from bank

Cost of Asset
Less Subsidy
Borrowing from bank
5,00,000
50,000
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
Factor = 1 1.10 =
= 9 times
Amount x 6.759
= 4,50,000
GT
Amount
= 66,578
+1

Year
Installment
Interest
@ 10%
Principal
Principal outstanding
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
10beg
66,578
6,056
60,522
1,15,545 55,023
= 60,522
-
5,00,000 10
50,000 x 0.50
=
=
Depreciation on actual cost @ 10% p.a =

=
50,000
25,000
PRAVINN MAHAJAN 9871255244, 8800684854
Particulars
Installment
Tax saving on
Interest
Tax saving
On depreciation
Statement of present value of cash outflow if asset is purchased

Amount
Period
factor
Present value
@ 5%
66,578
66578
0
1-9
1
7.108
66,578
4,73,236
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)
25,000
1-10e
7.722
(1,93,050)
2,56,955
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
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
1
2
3
4
5
Principal
1,00,000
1,00,000
1,00,000
1,00,000
1,00,000
Depreciation
Interest
5,00,000 x 0.1
4,00,000 x 0.1
3,00,000 x 0.1
2,00,000 x 0.1
1,00,000 x 0.1
= 50,000
= 40,000
= 30,000
= 20,000
= 10,000
Tax savings on interest @ 30%

15,000
12,000
9,000
6,000
3,000
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
@ 8%
Present
Value
Principal
1,00,000
1-5end
3.993
3,99,300
Interest
50,000
40,000
30,000
20,000
10,000
1end
2end
3end
4end
5end
0.926
0.857
0.794
0.735
0.681
46,300
34,280
23,820
14,700
6810
Tax savings
On Interest
15,000
12,000
9,000
6,000
3,000
1end
2end
3end
4end
5end
0.926
0.857
0.794
0.735
0.681
(13,890)
(10,284)
(7146)
(4,410)
(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)
3,43,812
PRAVINN MAHAJAN 9871255244, 8800684854
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

Amount
Period
Present value
1-5end
Factor
@ 8%
3.993
Lease Rent
Tax savings on
lease rent
0.3x
1-5end
3,993
(1.1979x)

3.993x - 1.1979x
2.7951x
x
=
=
=
3.993x
3,43,812
3,43,812
3,43,812
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
12,00,000 x 0.35
4,20,000
Statement of Present value of cash outflows

(if Asset is taken on lease)
Amount
Period
Factor
@ 16%
Present value
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
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
Amount
= 40,00,000
= 13,37,345

Year
Installment
Interest
@ 20%
Principal
Principal
Outstanding
Tax saving
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%
40,00,000
10,00,000
3,50,000
30,00,000
7,50,000
2,62,500
22,50,000
5,62,500
1,96,875
16,87,500
4,21,875
1,47,656
12,65,625
3,16,406
1,10,742
9,49,219
8,00,000
1,49,219
52,226
(1,49,219 x 0.35)
8,00,000 + 52,226 =
8,52,226
Cost
Dep 1 year
Dep 2
nd
yr
rd
Dep 3 yr
th
Dep 4 yr
th
Dep 5 yr
WDV after 5 years
Salvage value after 5 yrs
Capital loss
Tax savings on cap loss
Net salvage value
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of Present value of cash outflow if Loan is taken from Bank
Installment (Principal
+ interest)
Tax savings on
Interest and dep
Amount
Period
factor
@ 16%
Present
value
13,37,345
1 5 end
3.274
43,78,468
6,30,000
1e
0.862
(5,43,060)
0.743
(3,75,130)
(2,80,000 + 3,50,000)
504,886
2e
(2,42,386 + 2,62,500)
Salvage value
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)
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 lessors 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
@ 14%
Present
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
3,50,000
2,62,500
1,96,875
1,47,656
1,10,742
1e
2e
3e
4e
5e
0.877
0.769
0.675
0.592
0.519
3,06,950
2,01,863
1,32,891
87,412
57,475
8,52,226
Cash Inflows
5e
0.519
4,42,305
39,06,636
Tax savings on Depreciation
Salvage value
Present value of cash outflows

Purchase price of machine
40,00,000
0
1
NPV
Since NPV of lease is negative, so lessor should not lease the Asset
10
40,00,000
(93,364)
PRAVINN MAHAJAN 9871255244, 8800684854
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
1
2
3
4
5
Principal
12,000
12,000
12,000
12,000
12,000
Interest
7,200
5760
4320
2,880
1,440
Tax saving on Interest

2,160
1,728
1,296
864
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
1 5 end
P.V factor
@ 11%
3.696
Present
value
44,352
Principal Payment
12,000
5,040
4,032
3,024
2,016
1,008
1e
2e
3e
4e
5e
0.901
0.812
0.731
0.659
0.593
4,541.04
3,273.98
2,210.54
1,328.54
597.74
3,600
15
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)
42,425.40
Interest (net of
Tax saving
7,200 - 2,160
4,320 1,296
Tax savings
On depreciation
Computation of Annual Lease rentals

Present value of Annual lease rentals
Lease rent p.a
x
3.696
Tax savings
0.3x
3.696
2.5872x
=
x
=
11
Rs 42,425.40
3.696x
1.1088x
2.5872 x
42,425.40
16,398.19
PRAVINN MAHAJAN 9871255244, 8800684854
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
@ 6%
Present
value
Lease Rent
1,20,000
1,20,000
0
13
1
2.673
1,20,000
3,20,760
Tax saving on
lease rent
48,000
1 4e
3.465
(1,66,320)
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% =
Amount x 3.170
=
Amount
=
4,80,000
4,80,000
1,51,420

Year
Installment
Interest
Principal
1
2
3
4
1,51,420
1,51,420
1,51,420
1,51,420
48,000
37,658
26,282
13,920
1,03,420
1,13,762
1,25,138
1,37,500
Principal
outstanding
3,76,580
2,62,818
1,37,500
-
Statement of depreciation
Year
1
2
3
4
33%
45%
15%
7%
Depreciation
1,58,400
2,16,000
72,000
33,600
Tax saving on Depreciation

63,360
86,400
28,800
13,440
12
tax
saving @40%
19,200
15,063
10,513
5,568
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of Present value of cash outflow if asset is purchased

Particulars
Amount
period
factor
@ 6%
Present
value
Installment
1,51,420
1 4e
3.465
5,24,670
1e
2e
3e
4e
0.943
0.890
0.840
0.792
(77,854)
(92,302)
(33,023)
(15,054)
0.792
(57,024)
2,49,413
Tax saving on
Interest & depreciation 82,560
1,01,463
39,313
19,008
Salvage value
1,20,000
0.4 x 1,20,000
72,000
4e
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.
13
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of present value of cash inflow from point of view of lessor

Particulars
Lease rent
Tax on lease rent
Tax saving on
Depreciation
Amount
x
x
0.4x
Period
0
1-4
15
factor
1
3.170
3.791
Present
x
3.170x
(1.5164x)
10,157
15
3.791
38,505
)0.4
Present value of all cash inflows
4.170x 1.5164x + 38,505
2.6536x
x
=
=
=
1,26,965
1,26,965
88,460
33,335
Statement of present value of cash outflow if asset is acquired on lease (point of view of lessee)
Particulars
Amount
Period
Lease rent
33,335
33,335
Tax saving on
Lease rent
13,334
Present value of Cash outflow
Option 2
0
1-4
factor
@ 9%
1
3.240
Present
Value
33,335
1,08,005
1 5e
3.890
(51,869)
89,741
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
1
2
3
4
5
37,877
37,877
37,877
37,877
37,877
19,045
16,220
12,971
9236
4948
18,832
21,657
24,906
28,641
32,929
1,08,133
86,476
61,570
32,929
-
14
tax saving on
interest
7618
6488
5188
3694
1979
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of present value of cash outflow

Amount
Period
factor@ 9%
Present value
Installment
37,877
15
3.890
1,47,342
Tax saving on intt
7618
6488
5188
3694
1979
1e
2e
3e
4e
5e
0.917
0.842
0.772
0.708
0.650
(6986)
(5463)
(4005)
(2615)
(1286)
3.890
(39,511)
87,476
Tax saving on dep
10,157
15
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
4.240 x 3.890 (0.4x)
4.240 x - 1.556 x
2.684 x
x
=
=
=
=
=
Present value of cash outflow in loan

option
87,746
87,746
87,746
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
15
30,567x
3.791
Cash outflows
Fixed costs (Rent)
2,50,00,000
0
1
2,50,00,000
1-4
3.17
Net present value of cash inflow
No of flying hours to make renting viable option is
1,15,879x - 1042,50,000
=
0
x
15
900 hours
1,15,879x
2,50,00,000
792,50,000
0
PRAVINN MAHAJAN 9871255244, 8800684854
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
15
66,667x
Cash outflows
Cost of Aircraft
Overhaul cost
Annual fixed operating cost
2,52,735x
20,00,00,000 0
1
6,00,00,000
3e
0.751
1,00,00,000
1 5 3.791
Net present value of cash inflows
No of flying hours to make renting viable option is

2,52,735x - 2829,70,000
=
b.
3.791
20,00,00,000
4,50,60,000
3,79,10,000
0
1120 hours per year
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
=
.> 900 < 1306 =
1306
=
> 1306
=
it is not viable to acquire a plane either by renting or buying

it is better to rent the plane
either rent or buy
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) =
Present value of cash inflows @ 20%
=
IRR =
=
15 +
1,25,000 x 4.487 = Rs 5,60,875

1,25,000 x 3.837 = Rs 4,79,625
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
x5
18.746%
rate is
16
x 5 + 15
PRAVINN MAHAJAN 9871255244, 8800684854
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
18e
3.837
3.837x
Tax on lease rent
0.4x
18e
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
8e
0.233
23,300
0.4(
Salvage value
)
1,00,000
Present value of cash inflow

Annual lease rent to earn 20% rate of return
2.3022x 15,070 =
X
Annual lease rent
5,00,000
2,23,730
17
5,00,000
PRAVINN MAHAJAN 9871255244, 8800684854
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
(after tax)
x (1 0.5) = 0.5x
1.20(1 0.5) = 0.60x
1.50(1 0.5) = 0.75x
1 5e
6 10e
11 15e
3.791
3.791 x 0.621
3.791 x 0.386
24,60,000
2,00,000
2,00,000
14e
15e
0.263
0.239
(52,600)
(47,800)
82,000
1 15
7.606
6,23,692
15e
0.239
95,600
0
1.8955x
1.4125x
1.09749x
Cash outflows
Construction cost
+ registration cost
(6 x 1000 x 400)
+ 2.5% of 24lacs
Repairs (net of tax)
4,00,000 ( 1 -0.5)
Tax saving on dep

x 0.50
(24,60,000)
Salvage value
(8,00,000 0.5 x 8 lac) 4,00,000
Net present value
Normal lease rent is
4.40549 x - 18,41,108 = 0
x
normal rent
4,17,912 for 6 flats
= Rs 69,652
18
PRAVINN MAHAJAN 9871255244, 8800684854
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)
Option 2
96,000(1 0.5)= 48,000

1e
98,000( 1 0.5)= 49,000
2e
98,000( 1 0.5)= 49,000
3e
0.893
0.797
0.712
42,864
39,053
34,888
1,16,805
To purchase the computer by borrowing Rs 2,30,000 from bank @ 16% p.a

Repayment of loan
(interest after tax p.a
rd
+ principal in 3 year)
Maintenance, taxes
Insurance (after tax)
36,800(1 0.5)
18,400
18,400
2,30,000 + 18,400
1e
2e
3e
0.893
0.797
0.712
16,431
14,665
1,76,861
20,000( 1 0.5)
1 3e
2.402
24,020
20,000
1 3e
2.402
(48,040)
3e
0.712
(78,320)
1,05,617
Tax savings on depreciation
(
Salvage value
)x 0.5
1,10,000
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
19
PRAVINN MAHAJAN 9871255244, 8800684854
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

98,000( 1 0.5)= 49,000
98,000( 1 0.5)= 49,000
1e
2e
3e
0.893
0.797
0.712
42,864
39,053
34,888
1,16,805
2,30,000
2,30,000
20,000( 1 0.5)
1 3e
2.402
24,020
20,000
1 3e
2.402
(48,040)
0.712
(78,320)
1,27,660
(10,855)
Cash outflows
Purchase Price
Maintenance, taxes
Insurance (after tax)
Tax savings on
depreciation
(
)x 0.5
Salvage value
1,10,000
3e
Cash outflows
NPV
(1,16,805 - 1,27,660)
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) =
Present value of cash outflows @ 19%
=
IRR is =
=
18 +
4,00,000 x 4.078 =
4,00,000 x 3.954 =
16,31,200
15,81,600
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
x1
18.629%
31,200 change in rate is
20
x1
PRAVINN MAHAJAN 9871255244, 8800684854
ii.
Annual lease rent to earn 20% compound interest

Lease rent x factor (20% , 8yrs)
Rent x 3.837
Rent
Q14
Cash outflow
Lease period
Required rate
=
=
=
16,00,000
16,00,000
4,16,992
Rs 100 lakh
5 years
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)
st
Let lease rent of 1 year is x
0.833x + 0.694
+
+ 0.578
x
iii.
+
+ 0.482
= 100 lac
26,08,923
th
10,00,000 x 2.589
100 lac
+ 0.402
Annual lease rent of 10 lac for 4 years and balloon payment in 5

th
payment in 5 year
Present value of
Rs 10,00,000 for 4 years
+ P.V of lease
th
rent for 5 year
0.402 x
x
iv.
year. Amount of
100 lac
100 lac
=
Rs 184.35 lac
rd
Annual lease rent if rent is paid after 2 years from 3 year for 3 years
Annual lease rent x (factor 3 years 20%)(factor 2
nd
year, 20%) =
Lease rent x 2.106 x 0.694
Lease rent p.a
=
Rs 68.419 lacs p.a
21
100 lacs
100 lacs
PRAVINN MAHAJAN 9871255244, 8800684854
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
2,00,000
2,00,000
2,00,000
Salvage value
10,00,000
Particulars
Installment and interest
Payment

And Interest
Salvage value
Statement of NPV under purchase option

period
Amount
Factor @ 8%
1end
8,52,000
0.926
2end
11,22,000
0.857
3end
9,86,000
0.794
1end
2 end
3 end
3 end
3,76,000
0.926
3,36,000
0.857
2,68,000
0.794
10,00,000
0.794
NPV of cash flows
Present value
7,88,952
9,61,554
7,82,884
(3,48,176)
(2,87,952)
(2,12,792)
(7,94,000)
8,90,470_
Alternative 2- Lease option

Statement of lease rent
Particulars
Year 1
Lease rent
5,00,000
10 % of revenue
2,25,000
Lump sum payment
7,25,000
Year 2
5,00,000
2,50,000
7,50,000
Year 3
5,00,000
2,75,000
6,00,000
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
22
PRAVINN MAHAJAN 9871255244, 8800684854
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.
Year
1
2
3
Statement of Depreciation and tax saving on depreciation
(in lacs)
Book value
At beg of year
600
450
337.5
Cl WDV
Tax saving
450
337.5
253.125
52.50
39.375
29.531
Depreciation
of the year(25%)
150
112.5
84.375
Salvage value after 3 years

Capital loss after 3 years
Tax saving on capital loss
nil
253.125
88.59 lacs
Statement of lease rent

rd
Let lease rent of 3 year is x

Year
1
2
3
Lease rent
3x
2x
x
Lease rent after tax

3x ( 1 0.35) = 1.95x
2x ( 1 0.35) = 1.30x
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
1.95x
1.30x
0.65x
period
1e
2e
3e
factor
0.909
0.826
0.751
Present value
1.77255 x
1.0738 x
0.48815x
52.5
39.375
29.531
1e
2e
3e
0.909
0.826
0.751
47.7225
32.52375
22.17778
Tax savings on cap loss
88.59
3e
0.751
66.5339
Purchase Price
600
NPV
(600)
0
Lease Rent (Net of tax)
Tax savings on dep
3.3345x - 431.042
=
rd
Lease rent of 3 year

nd
st
=
=
=
0
= 129.267 lacs
129.267 lacs
258.534 lacs
387.801 lacs
23
PRAVINN MAHAJAN 9871255244, 8800684854
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%
Present value of 4,00,000 p.a for 3 years @ 28%
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
ROI paid is
27% +
=
7,58,400
7,47,200
x1
27.75%
change in rate is
x 1 = 0.75

Period Installment
0
1e
2e
3e
2,50,000
4,00,000
4,00,000
4,00,000
Interest
@ 27.75%
2,08,125
1,53,484
88,391
Principal
Principal o/s
Tax saving on Intt
2,50,000
1,91,875
2,46,516
3,11,609
7,50,000
5,58,125
3,11,609
-
72,844
53,719
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)
Present value
0
1 3e
factor
@ 18.0375%
1
2.173
Tax savings on intt 72,844

53,719
30,937
1e
2e
3e
0.847
0.718
0.608
(61,699)
(38,570)
(18,810)
Tax savings on
n
dep
1 3e
2.173
(2,53,517)
Installment
Amount
period
2,50,000
4,00,000
1,16,667
2,50,000
8,69,200
x 0.35
24
7,46,604
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of Present value of cash outflow (if asset is taken on lease)

Amount
Initial service fee 20,000
Tax savings on
this fee at
st
1 yr end
(20,000 x 0.35) 7,000
period
Present value
factor
@ 18.0375%
1
1e
0.847
(5,929)
2.173
6,10,178
6,24,249
Lease rent
after tax
( 4,32,000 x 0.65) 2,80,800
1 3e
20,000
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
After tax
x( 1 0.5)
x
x
0
19
1
5.759
x
5.759x
Tax on Lease rent
0.5x
1 10
6.145
(3.0725x)
1,00,000
1 10
6.145
6,14,500
20,00,000
NPV
(20,00,000)
0
Tax saving on dep
x 0.5
Purchase price
Annual lease rent

3.6865x x
13,85,500
25
3,75,831
PRAVINN MAHAJAN 9871255244, 8800684854
Statement of Present value of cash inflows for lessee

Amount
Period
Present value
0
19
factor @8%
16(1 0.5)
1
6.247
Lease rent
3,75,831
3,75,831
Tax saving on
lease rent
1,87,916
1 10
6.71
(12,60,916)

Option 2
3,75,831
23,47,816
14,62,731
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%
Amount x ( 1 + 4.607)
Amount
=
=
=
20,00,000
20,00,000
3,56,697

Year
1
2
3
4
5
6
7
8
9
10
installment
3,56,697
3,56,697
3,56,697
3,56,697
3,56,697
3,56,697
3,56,697
3,56,697
3,56,697
3,56,697
interest
2,62,928
2,47,925
2,30,522
2,10,334
1,86,916
1,59,751
1,28,240
91,686
48,668
principal
3,56,697
93,769
1,08,771
1,26,175
1,46,363
1,69,781
1,96,946
2,28,457
2,65,011
3,08,029
principal o/s
16,43,303
15,49,534
14,40,762
13,14,587
11,68,224
9,98,443
8,01,497
5,73,040
3,08,029
-
Tax saving on intt

1,31,464
1,23,962
1,15,261
1,05,167
93,458
79,876
64,120
45,843
24,334
Statement of present value of cash outflow if asset is purchased

Amount
Period
Installment
3,56,697
3,56,697
0
19
Tax saving on intt
1,31,464
1e
1,23,962
2e
1,15,261
3e
1,05,167
4e
93,458
5e
79,876
6e
64,120
7e
45,843
8e
24,334
9e
1,00,000
1 10e
Tax saving on dep
Purchasing the asset is better option
26
factor
@ 8%
1
6.245
Present value
0.926
0.857
0.794
0.735
o.681
0.630
0.583
0.540
0.500
6.71
(1,21,736)
(1,06,235)
(91,517)
(77,298)
(63,645)
(50,322)
(37,382)
(24,755)
(12,167)
(6,71,000)
13,28,213
3,56,697
22,27,573
PRAVINN MAHAJAN 9871255244, 8800684854
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
Amount
Period
Present value
0
15
factor
@ 9%
1
3.890
Lease rent
4,50,000
4,50,000
Tax saving on
lease rent
1,80,000
16
4.486
(8,07,480)
4,50,000
17,50,500

Option 2
13,93,020
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
1
2
3
4
5
6
5,28,474
5,28,474
5,28,474
5,28,474
5,28,474
5,28,474
3,00,000
2,65,729
2,26,317
1,80,994
1,28,872
68,932
2,28,474
2,62,745
3,02,157
3,47,480
3,99,602
4,59,642
Depreciation p.a
= 3,00,000
17,71,526
15,08,781
12,06,624
8,59,144
4,59,542
-
tax saving
1,20,000
1,06,292
90,527
72,398
51549
27,573
3,00,000 x 0.4 = 1,20,000

Amount
period
Present value
16
factor
@ 9%
4.486
Installment
5,28,474
Tax saving on
n
Interest + dep
2,40,000
2,26,292
2,10,527
1,92,398
1,71,549
1,47,573
1e
2e
3e
4e
5e
6e
0.917
0.842
0.772
0.708
0.650
0.596
(2.20.080)
(1,90,538)
(1,62,527)
(1,36,218)
(1,11,507)
(87,954)
0.596
(1,19,200)
13,42,710
Salvage value
2,00,000
6e
Purchase option is better
23,70,734
Annual maintenance expenses are ignored as such expenses are incurred whether asset is taken on
lease or purchase by loan
27
PRAVINN MAHAJAN 9871255244, 8800684854
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
Amount
period
factor
12%
x
0
1
x
14
3.037
Lease rent
Purchase price
Annual lease rent
2.2345x x
Q21
x
3.037x
15
3.605
(1.8025x)
3,00,000
15
3.605
10.81,500
30,00,000
0
NPV
(30,00,000)
0
Tax paid on lease rent 0.5x

Tax saving on dep
Present value
19,18,500 =
=
0
8,58,581
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
Lease rent

Amount
period
factor@ 10%
x
0
1
x
19
5.759
Present value
x
5.759x
Tax paid on
lease rent
0.4x
0.3x
15
6 10
3.791
3.791 x 0.621
(1.5164x)
(0.7063x)
Tax saving on
n
Dep
40,000
30,000
15
6 10
3.791
3.791 x 0.621
1,51,640
70,626
Purchase price
10,00,000
0
NPV
(10,00,000)
0
Annual lease rent

4.5363x - 7,77,734
x
= 0
= 1,71,447
28
PRAVINN MAHAJAN 9871255244, 8800684854
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%
Year
Statement of depreciation
op.WDV
Depreciation
Cl. WDV
1
2
3
4
5
3,30,000
2,47,500
1,85,625
1,39,219
1,04,414
Salvage value assumed Nil

Tax saving on Capital loss
82,500
61,875
46,406
34.805
26,104
2,47,500
1,85,625
1,39,219
1,04,414
78,310
78,310 x 0.5
Tax saving
n
On Dep
41,250
30,937
23,203
17,402
13,052
39,155
Lease rent

Amount
period
factor@ 8%
x
1-5
3.993
Tax paid on
lease rent
0.5x
15
3.993
(1.9965x)
41250
30937
23203
17402
13052
1e
2e
3e
4e
5e
0.926
0.857
0.794
0.735
0.681
38,198
26,513
18423
12790
8888
Salvage value
39,155
5e
0.681
26,665
Purchase price
3,30,000
0
NPV
(3,30,000)
0
Tax saving on
n
Dep
Annual lease rent

1.9965x - 1,98,523
x
= 0
= 99,436
29
Present value
3.993x
PRAVINN MAHAJAN 9871255244, 8800684854
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

Amount
period
factor@ 10%
x
15
3.791
Present value
3.791x
Salvage value
To be discounted
at 25%
10,000
5e
0.328
3,280
Purchase price
10,00,000
0
NPV
(1,00,000)
0
Annual lease rent

3.791x - 96,720
x
= 0
= 25,513
ii.
Lease rent are payable at beg of each year
Amount
period
factor@ 10%
x
0
1
x
1-4
3.170
Present value
x
3.170x
Salvage value
To be discounted
at 25%
10,000
5e
0.328
3,280
Purchase price
10,00,000
0
NPV
(1,00,000)
0
Lease rent
Annual lease rent

4.170x - 96,720
x
= 0
= 23,194
30
PRAVINN MAHAJAN 9871255244, 8800684854
Q24
Lessee has received 2 offers from leasing company for leasing the asset costing Rs 1,50,000
Option 1
st
Pay lease rentals for 96 months. Rs 30 / 1000 for 1 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
16
78
=
=
4500 x 12
750 x 12
= 54,000 p.a
= 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)

Year ( 1 6)
=
54,000 x 0.4
=
Factor (0.869 + 0.756 + 0.658 + 0.572 + 0.497 + 0.432) =
Year (7 8)
Factor ( 0.376 + 0.327_
9,000 x 0.4
=
=
0.702
21,600
3.784
3600
0.703
Lease rent
Tax saving on rent
Amount
54,000
9.000
Period
16
78
factor
3.940
0.702
Present value
2,12,760
6,318
21,600
3600
16
78
3.784
0.703
(81,734)
(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.
31
PRAVINN MAHAJAN 9871255244, 8800684854
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
Annual rent
5,250 x 12
Discounted at ( 0.923 + 0.795 + 0.685 + 0.590 + 0.509) =

Yearly rate on monthly average basis
= Rs 5,250 pm
=
Rs 63,000
3.502

=
63,000 x 0.4
=
Discounted at yearly rate (0.869 + 0.756 + 0.658 + 0.572 + 0.497)=
25,200 p.a
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)
Amount
Period
factor
Present value
Initial deposit
Lease rent
Tax saving on rent
Tax saving on dep
22,500
63,000
25,200
2250
1688
1266
0
1 60 month
1 5 yr
6e
7e
8e
1
3.502
3.352
0.432
0.376
0.327
22,500
2,20,626
(84,470)
(972)
(635)
(414)
Salvage value
9492
8e
0.327
(3104)
1,53,531
NPV
32

Leasing Solution Ca-Final SFM (Full)

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PRAVINN MAHAJAN 9871255244, 8800684854

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

Taking the asset on lease.

Statement of Present Value of Cash Outflow

Purchasing the asset by obtaining loan from bank

Loan of Rs 10,00,000 @ 15%

PRAVINN MAHAJAN 9871255244, 8800684854

Statement of Present value on cash outflows

Tax savings on Intt

Tax savings on Dep

Present value of cash outflow

PRAVINN MAHAJAN 9871255244, 8800684854

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

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

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

To Purchase computer by borrowing from bank @ 12%

PRAVINN MAHAJAN 9871255244, 8800684854

Statement of Present value of cash outflow if asset is purchased

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

Lease rent p.a

PRAVINN MAHAJAN 9871255244, 8800684854

Purchase the Asset by borrowing from bank

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

Statement of Principal and Interest

Depreciation on actual cost @ 10% p.a =

PRAVINN MAHAJAN 9871255244, 8800684854

Statement of present value of cash outflow if asset is purchased

Present value of cash outflow

PRAVINN MAHAJAN 9871255244, 8800684854

To acquire the asset by taking a loan from Bank

Tax savings on interest @ 30%

Machine will be fully depreciated during its lifetime

Present value of cash outflow

PRAVINN MAHAJAN 9871255244, 8800684854

To acquire asset on lease

Statement of Present value of cash outflow

Present value of cash outflow

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

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

Statement of Present value of cash outflows

Present Value of Cash outflow

PRAVINN MAHAJAN 9871255244, 8800684854

Purchase the asset by borrowing from bank

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

Amount x factor (5 yrs, 20% )

Statement of Principal and Interest

Depreciation @ 25% p.a WDV basis

PRAVINN MAHAJAN 9871255244, 8800684854

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

Present value of cash inflows

Tax savings on Depreciation

Present value of cash outflows

PRAVINN MAHAJAN 9871255244, 8800684854

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

Tax saving on Interest

Statement of Depreciation on Asset

Tax savings on depreciation

12,000 x 0.3 = 3,600

Statement of present value of cash outflows if asset is purchased

Salvage value net of

Computation of Annual Lease rentals

PRAVINN MAHAJAN 9871255244, 8800684854

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