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Lease Financing Final Notes

This document contains 7 questions related to lease financing. Question 1 provides details of a lease agreement between Roshni Ltd. and Sun Ltd. for a plant and asks to calculate interest and provide an amortization schedule. Question 2 gives terms of a finance lease between Ramesh and Mahesh and asks for an amortization schedule. Question 3 provides payment details for machinery purchased with a down payment and asks to calculate annual interest payments. The remaining questions provide additional lease financing scenarios and ask to evaluate options, calculate cash flows, and recommend the better option based on specified factors.

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155 views

Lease Financing Final Notes

This document contains 7 questions related to lease financing. Question 1 provides details of a lease agreement between Roshni Ltd. and Sun Ltd. for a plant and asks to calculate interest and provide an amortization schedule. Question 2 gives terms of a finance lease between Ramesh and Mahesh and asks for an amortization schedule. Question 3 provides payment details for machinery purchased with a down payment and asks to calculate annual interest payments. The remaining questions provide additional lease financing scenarios and ask to evaluate options, calculate cash flows, and recommend the better option based on specified factors.

Uploaded by

GLOBUS CYBER
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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LEASE FINANCING

Q.1) Roshni Ltd. Takes a plant on lease on 1st January 2018 from Sun Ltd. The following details
are relevant to lease.
i) Fair value of assets is Rs.1,00,000.
ii) Residual Value is Nil after 5 years.
iii) Lease rental is Rs. 27,740 for 5 years payable at the end of each year.
Show interest calculation & Loan Amortization Schedule.

Q.2) Ramesh takes an asset on finance lease from Mahesh. Terms which are given below.
i) Lease Term is 4 Years.
ii) Fair Value at the initial of the lease is Rs.12,50,000.
iii) Lease rent is Rs.4,00,000 at the end of year.
iv) Guaranteed residual value is Rs.85,000.
v) Expected residual value is Rs.1,88,900.
vi) Rate of Interest is 15%.
You are required to prepare Loan Amortization Schedule.

Q.3) Sam Ltd. purchased machinery from Pam Ltd. on the following term:
(a) Fair Value = Rs.1,58,500.
(b) Cash down payment = 20%
(c) Balance to be discharged in four equal installments together with interest @ 10% p.a be
paid at the end of each year. You are required to compute the payment of interest to be
made each year.

Q.4) DLP Pvt Ltd. is considering the possibility of purchasing a multipurpose machine which
cost Rs.10 lakhs. The machine has an expected life of 5 years. The machine generates Rs.6 lakhs
per year before depreciation and tax and the management wishes to dispose the machine at the
end of 5 years which will fetch Rs.1 lakh. The depreciation allowable for the machine is 25% on
written down value and the company’s tax rate is 50%.
The company approached a NBFC for a five years lease for financing the asset which
quoted a rate of Rs.28,000 per month. The company wants you to evaluate the proposal with
purpose option.
The cost of capital of the company is 12% and for lease option it wants you to consider a
discount rate of 16%.

Q.5) ABC Ltd. is considering a proposal to acquire a machine costing Rs.1,10,000 payable
Rs.10,000 down and balance payable in 10 annual equal installments at the end of each year
inclusive of interest chargeable at 15%.
Another option before it is to acquire the asset on a lease rental of Rs.15,000 per annum
payable at the end of each year for 10 years.
The following information is also available:
1. Terminal scrap value of Rs.20,000 is realizable, if the asset is purchased.
2. The company provides 10% depreciation on straight line method on the original cost.
3. Income tax rate is 50%.
You are required to compute and analyze cash flows and to advise as to which option is
better.

PROF. VIJAY VANJARE Page 1


LEASE FINANCING
Q.6) ABC company has decided to acquire a Rs.5,00,000 pulp control devise that has a useful
life of ten years. A subsidy of Rs.50,000 is available at the time the device is acquired and placed
into service. The device would be depreciated on straight-line basis and no salvage value is
expected. The company is in the 50% tax bracket.
If the acquisition is financed with the lease, lease payments of Rs.55,000 would be required
at the beginning of each year. The company can also borrow at 10% repayable in equal
installments. Debt payments would be due at the beginning of each year :
1. What is the present value of cash outflow for each of these alternatives, using the after
tax cost of debt?
2. Which of the two alternatives is preferable?

Q.7) XYZ Ltd. Requires an equipment costing Rs.10,00,000; the same will be utilized over a
period of years. It has two financing options in this regard:
1. Arrangement of a loan of Rs.10,00,000 at an interest rate of 13 percent per annum; the
loan being repayable in 5 equal year end installments.
2. Leasing the equipment for a period of five years at an early rental of Rs.3,30,000 payable
at the year end.
3. The rate of depreciation is 15% on written Down Value (WDV) basis, income tax rate is
35% and discount rate is 12%.
Advice the XYZ Ltd., that which of the financing options is to be exercised and why.

PROF. VIJAY VANJARE Page 2

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