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Leasing & HP Prob

This document contains 7 questions related to leasing and hire purchase options for assets. The questions provide details about the costs, tax rates, lease/rental payments, salvage values, and lives of various assets. Candidates are asked to evaluate the leasing and purchasing options from the perspectives of different companies/landlords and recommend the better option based on the financial details provided, using concepts like net present value, internal rate of return and discounting cash flows.

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Amruta Peri
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92 views

Leasing & HP Prob

This document contains 7 questions related to leasing and hire purchase options for assets. The questions provide details about the costs, tax rates, lease/rental payments, salvage values, and lives of various assets. Candidates are asked to evaluate the leasing and purchasing options from the perspectives of different companies/landlords and recommend the better option based on the financial details provided, using concepts like net present value, internal rate of return and discounting cash flows.

Uploaded by

Amruta Peri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MBA Sem-III

Project Appraisal and Finance


Module 2: Leasing and Hire Purchase

Q.1. A person wishing to take on lease an office premises, has been given two options
by the landlord. The options are:
Option I : Lease period 18 years
Non-refundable deposit of Rs. 2,00,000 payable at the end of year 1
A yearly rent of Rs. 60,000 to be increased by 10% in year 5, 10 and 15 of
tenancy.
Option II : A yearly rent of Rs. 1,00,800 to be increased by 10% in years 5, 10 and
15 of tenancy.
Lease Period 18 years
You are required to give your views on the alternatives from the point of view of the
tenant. The rate of discount is to be taken at 18%. The present value of Re.1 payable at
the end of the each year at 18% starting from year 1 to year 18 are as follows: 1.0,
0.847458, 0.718184, 0.608631, 0.515789, 0.437109, 0.370432, 0.313925, 0.266038,
0.225456, 0.191064, 0.161919, 0.137220, 0.116288, 0.098549, 0.083516, 0.070776 and
0.059980.

Q.2. A firm can purchase for Rs. 2,500 an asset having life of 5 years after which its
salvage value is Rs. 500. The firm provides depreciation on straight line method.
Purchasing and using the asset will increase the firm’s expected revenues by Rs. 1,500
per year and will raise its expected operating expenses (not including depreciation) and
interest by Rs. 700 per year. The corporate tax is 50% and the cost of capital of the firm
is 10%.
The firm can also lease the asset for a yearly rental of Rs. 650. The incremental revenue
will be same at Rs. 1,500 per year and the increase in firm’s expected non-depreciable
expenses is Rs. 600 per year only. Evaluate the proposals.
Q.3. The following data is relating to an asset to be leased by X Ltd.
a. Cost of equipment is Rs. 1,00,000.
b. The cost of capital of the lessor is 12%.
c. The lessor is in 40% tax bracket.
d. The depreciation is charged according to straight line method and the salvage value is
Rs. 20,000 after 5 years.
e. The direct cost to the lessor is Rs. 500 at the end of the 1st year.
f. The estimated cost for general administration in respect of the equipment, to the lessor
is Rs. 1,500 per year.
g. The lessee agreed to pay : An annual rent of Rs. 36,000 for 5 years, a security deposit
of Rs. 3000 which is refundable at the end of the lease term, and a sum of Rs. 1,350 as
non-refundable management fees payable at the time of inception of the lease.
Evaluate the proposal from the point of view of the lessor.

Q.4. A Machine costing Rs. 10,00,000, having life of 5 years. There are two options:
a. Leasing with a lease rental of Rs. 2,70,000 per year for 5 years. The lease rental is
payable at the beginning of the year.
b. Borrowing @ 16% rate of interest with 5 equal annual year end instalments.
Depreciation is on straight line method. The salvage value at the end of 5 years shall be
Rs. 1,50,000. The tax rate is 40%.
PVF @ 12%
Which option should the company choose? (PVAF @ 16% for 5 years = 3.274).

Q.5. D Ltd is considering the possibility of purchasing a multipurpose machine which


cost Rs. 10,00,000. The machine has an expected life of 5 years. The machine generates
Rs. 6,00,000 per year before depreciation and tax, and the management wishes to
dispose the machine at the end of 5 years which will fetch Rs. 1,50,000. 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 year lease for
financing the asset which quoted a rate of Rs. 28 per thousand per month.
PVF for purchasing option = 12% & for leasing option 16%
Q.6. ABC ltd needs an asset for which the following two options have been placed by
the manufacturer:
a. The asset can be acquired on lease basis on a payment of annual lease rent of Rs.
15,000 p.a. for 4 years.
b. The asset is available of Rs. 50,000 for which funds can be raised by the issue of 12%
loan, which is to be repaid together with interest in 4 equal annual instalments.
The firm provides depreciation on straight line basis and the tax rate applicable is 30%.
Which option should the firm choose?

Q.7. Hypothetical Ltd is planning to have an access to a machine for a period of 5 years.
The company can either acquire the machine through the leasing arrangement or it can
borrow money at 14% to buy the machine. The company is in 50% tax bracket.
In case of purchasing the machine (which costs Rs. 3,43,300), the company would have
to repay 14% five year loan in 5 equal annual instalments, each instalment becoming
due at the end of each year. Machine would be depreciated on a straight line basis, with
no salvage value. Advise the company which option it should go for, assuming lease
rents of Rs. 1,20,000 are paid at the end of the year.

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