CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near

9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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 Factor = 1÷ 1.10 =
Amount x 6.759 = 4,50,000 = 9 times
Amount = 66,578 GT
+1
Statement of Principal and Interest

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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)

Present value of cash outflow 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.

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

Statement of Principal and Interest

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)

Present value of cash outflow 3,43,812

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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 Factor Present value
@ 8%
Lease Rent x 1-5end 3.993 3.993x
Tax savings on
lease rent 0.3x 1-5end 3,993 (1.1979x)
Present value of cash outflow 3,43,812

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)

Amount Period Factor Present value

@ 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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

Statement of Principal and Interest

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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
Statement of Principal and Interest
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

60,000
Depreciation p.a = 12,000
5
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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

Statement of Principal and Interest

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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)
Maintenance cost
(Net of Tax) 12,000(.6) 7200 1 – 4e 3.465 24,948
Salvage value
1,20,000 –
0.4 x 1,20,000 72,000 4e 0.792 (57,024)
Present value of cash outflows 2,74,361

Since present value of cash outflow is lower in case of loan option so company should purchase the
asset by borrowing from bank

Q8 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.

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
𝟏,𝟐𝟔,𝟗𝟔𝟓
( )0.4
𝟓
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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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.

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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
16,00,00,000
( – 36,100) x 30,567x 1–5 3.791 1,15,879x
2400

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
1042,50,000
x =
1,15,879
x = 900 hours

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

No of flying hours to make renting viable option is

2,52,735x - 2829,70,000 = 0
2829,70,000
x =
2,52,735
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
At 15% ……. 5,60,875
60,875 At ? ………5,00,000
IRR = 15 + x5
81,250 At 20% ……. 4,79,625
= 18.746% For diff in PV of 81,250, diff in rate is
5%. For diff in PV of 60,875, diff in
60,875
rate is x 5 + 15
81,250

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

16
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

Amount Period factor @ 20% Present value

Lease rent x 1–8e 3.837 3.837x

Tax on lease rent 0.4x 1–8e 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
5,00,000 − 1,00,000
0.4( )
8
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
5,15,070
X =
2.3022
Annual lease rent = 2,23,730

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

24,60,000
x 0.50 82,000 1 – 15 7.606 6,23,692
15

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
18,41,108
x =
4.40549
normal rent = 4,17,912 for 6 flats
4,17,912
= = Rs 69,652
6

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Statement of Present value of cash outflow

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
Present value of cash outflow 1,16,805
Option 2 To purchase the computer by borrowing Rs 2,30,000 from bank @ 16% p.a
Statement of Present value of cash outflow
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
2,30,000−1,10,000
( )x 0.5 20,000 1 – 3e 2.402 (48,040)
3

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

Present value of cash outflow 1,05,617
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
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
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
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
2,30,000−1,10,000
( )x 0.5 20,000 1 – 3e 2.402 (48,040)
3

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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

IRR is = 18 + x1
49,600 ? 16,00,000
= 18.629% 19%........ 15,81,600
For change in PV of 49,600, change in
rate is 1%. For change in PV of
31,200
31,200 change in rate is x1
49,600

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

𝑥 1.15 𝑥 (1.15)2 𝑥 (1.15)3 𝑥 (1.15)4 𝑥

+ + + + = 100 lac
(1,20) (1.20)2 (1.20)3 (1.20)4 (1.20)5

0.833x + 0.694 (1.15 𝑥) + 0.578(1.15)2 𝑥 + 0.482 (1.15)3 𝑥 + 0.402(1.15)4 𝑥 = 100 lac

x = 26,08,923

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

100 − 25.89
x = = Rs 184.35 lac
0.402

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

100 𝑙𝑎𝑐𝑠
Lease rent p.a =
2.106 x 0.694
Rs 68.419 lacs p.a

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_

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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
431.042
X = = 129.267 lacs
3.3345
Lease rent of 3rd year = 129.267 lacs
Lease rent of 2nd year = 258.534 lacs
Lease rent of 1st year = 387.801 lacs

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%.............758400

8,400 ?...................7,50,000
27% +
11,200
x1 28%..............7,47,200
= 27.75% For PV of 11,200 change in rate is
1%. For change in PV of 8,400
8,400
change in rate is x 1 = 0.75
11,200

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Statement of Principal and interest

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)
Amount period factor Present value
@ 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
10,00,000
x 0.35
3
Present value of cash outflow 7,46,604

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

Amount period factor Present value

@ 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
Present value of cash outflow 6,24,249

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

20,00,000
x 0.5 1,00,000 1 – 10 6.145 6,14,500
10
Purchase price 20,00,000 0 1 (20,00,000)
NPV 0

Annual lease rent

3.6865x - 13,85,500 = 0
13,85,500
x = = 3,75,831
3.6865

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
Present value of cash outflow 14,62,731

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

25
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Statement of Principal and interest

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)
Present value of cash outflow 13,28,213
Purchasing the asset is better option

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 factor Present value
@ 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
Present value of cash outflow 13,93,020

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi
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

Statement of Principal and interest

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

20,00,000 − 2,00,000
Depreciation p.a = 3,00,000
6
Tax saving on depreciation = 3,00,000 x 0.4 = 1,20,000

Statement of Present value of cash outflows

Amount period factor Present value
@ 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)
Present value of cash outflow 13,42,710
Purchase option is better
Annual maintenance expenses are ignored as such expenses are incurred whether asset is taken on
lease or purchase by loan

Q20 ITC finance is a leasing company, considering to lease a machine costing Rs 30 lac.
Discount rate 12%
30,00,000
Depreciation p.a = 6,00,000
5
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

27
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Statement of Present value of cash outflow

Amount period factor Present value
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
10,00,000
Depreciation p.a = 1,00,000 p.a
10
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 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

Statement of Present value of cash outflow

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

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CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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

Statement of Present value of cash outflow

Amount period factor@ 8% Present value
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

29
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

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

Statement of Present value of cash outflow

Amount period factor@ 10% Present value
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

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

Statement of Present value of cash outflow

Amount period factor@ 10% Present value
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

30
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

30
Year 1 – 6 (Month 1 – 72) = 1,50,000 x = Rs 4500 pm
1000
5
Year 7 – 8 (Month 73 – 96) = 1,50,000 x = Rs 750 pm
1000

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

Statement of Present value of cash outflows

Amount Period factor Present value

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.

31
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

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

35
Monthly lease rent = 1,50,000 x = Rs 5,250 pm
1000
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)

Statement of Present value of cash outflow

Amount Period factor Present value

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

32
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Q25 Co has a machine in block @ 0 Book value which can be sold in market @ Rs 5,00,000
Proposal of Y
Statement of NPV
Cash recd on sale 5,00,000
- Tax on CG 1,70,000 3,30,000 0 1 3,30,000

Deposit in Bank (3,30,000) 0 1 (3,30,000)

Lease Rent (net of tax)
90,000(1 -0.34) 59,400 1- 5e 3.605 (2,14,137)
Interest on Deposit
3,30,000 (0.0875)(0.66) 19,058 1 – 5e 3.605 68,704
Deposit withdraw 3,30,000 5e 0.567 1,87,110
Net Present value 41,677

Proposal of Z
Statement of NPV
Sale of Asset 5,00,000
Taxon CG 1,70,000 3,30,000 0 1 3,30,000

Purchase of New Asset 4,00,000 0 1 (4,00,000)

Tax saving on depreciation 1,36,000 1e 0.893 1,21,448
Maintenance cost (net of tax)
1500 ( 1 -0.34) 9900 1 – 5e 3.604 (35,680)
Salvage value 1 lac x 0.66 66,000 5e 0.567 37,422
Net Present value 53,190

Since cash Inflow of proposal of Z is higher, so Z is better

Q26 Company desires to acquire a machine costing Rs 20,00,000 having a life of 5 years.
Company has 2 options

1. To acquire asset on lease-Company will pay annual lease rent of Rs 5,20,000 at

beginning of each year.
Statement of Cash Outflow ( If asset acquired on lease)
10%
Lease Rent 5,20,000 0 1 5,20,000
5,20,000 1-4e 3.170 16,48,400
Tax saving on lease Rent (1,56,000) 1-5e 3.791 (5,91,396)
15,77,004

2. To purchase the asset by borrowing from bank @ 12%

𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 20,00,000
Annual installment = = = Rs 4,95,417
𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 4.037

33
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Statement of Principal and interest

Installment Interest Principal loan o/s Tax saving on Int
4,95,417 - 4,95,417 15,04,583 -
4,95,417 1,80,550 3,14,867 11,89,716 54,165
4,95,417 1,42,766 3,52,651 8,37,065 42,830
4,95,417 1,00,448 3,94,969 4,42,096 30,134
4,95,417 53,321 4,42,096 - 15,996
Statement of depreciation
Book Value Depn Tax saving on depn
20,00,000 4,00,000 1,20,000
16,00,000 3,20,000 64,000
12,80,000 2,56,000 51,200
10,24,000 2,04,800 40,960
8,19,200 1,63,840 32,768
Statement of Cash outflow
Installment 4,95,417 0 1 4,95,417
4,95,417 1 – 4e 3.170 15,70,472
Tax saving on Int 54,165 1e 0.909 49,236
42,830 2e 0.826 35,378
30,134 3e 0.751 22,631
15,996 4e 0.683 10,925
Tax saving on depn 1,20,000 1e 0.909 1,09,680
64,000 2e 0.826 52,864
51,200 3e 0.751 38451
40,960 4e 0.683 27,976
32,768 5e 0.621 20,349
Salvage value
2,00,000 + 0.3 (455360) 3,36,608 5e 0.621 2,09,034
14,89,365
Statement of Net advantage of Leasing
Cash outflow of leasing 15,77,004
Cash outflow of purchase 14,89,365 87,639
Net advantage of Lease proposal is negative so lease proposal is not viable

ii. Break even Lease Rent =

Lease Rent will be at break even if present value of cash outflow of purchase
proposal is equal to present value of cash outflow of lease proposal.

Statement of cash outflow of lease proposal

Lease Rent x 0 1 x
X 1 – 4e 3.170 3.170x
Tax saving on Lease rent 0.3 x 1- 5e 3.791 (1.1373x)
3.0327 x
3.0327 x = 14,89,365
14,89,365
X = 3.0327
= 4,91,102 Rs

34
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Q27 Company is considering to acquire a machine having a life of 5 years.

Cost of Machine = Present value of all future installments
= 1,78,858 x 3.914
= 7,00,000
Lease rent = 7,00,000 x 0.25
= 1,75,000
Co has 2 options
1. To acquire asset on lease
Statement of cash outflow ( if asset taken on lease)
8.4
Lease Rent 1,75,000 1 – 5e 3.951 6,91,425
Tax on LR 70,000 1 – 5e 3.951 (2,76,570)
4,14,855
2. To purchase the asset
𝐿𝑜𝑎𝑛 𝐴𝑚𝑜𝑢𝑛𝑡 7,00,000
Annual installment = 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟
= 3.914
= 1,78,845

Statement of Principal and interest

Instalment Interest Principal Loan O/s Tax saving on Interest
1,78,845 - 1,78,845 5,21,155 -
1,78,845 72,962 1,05,883 4,15,272 29185
178845 58138 1,20,707 2,94,565 23,255
1,78,845 41,239 1,37,606 1,56,959 16,496
1,78,845 21,886 1,56,959 - 8,754

7,00,000 − 24,998
Dep = 5
= 1,35,000
Tax saving = 1,35,000 ( 0.3) = 40,500 Rs
Statement of Cash outflow ( If asset Purchased)
8.4%
Installment 1,78,845 0 1 1,78,845
1,78,845 1- 4e 3.283 5,87,148
Tax saving on 29,185 1e 0.923 26,938
Interest 23,255 2e 0.851 19,790
16,496 3e 0.785 12,949
8,754 4e 0.724 6,338
Tax saving on
Depn 54,000 1 – 5e 3.951 2,13,354
Salvage value 24,998 5e 0.668 16,699
4,69,925

The company is advised to opt for leasing as PV of cash outflow is lower

35
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Q28 Co.is considering to acquire machine costing Rs 1,10,000. Co.has 2 options

1. To acquire asset on lease.
Co. will pay lease rent of Rs15,000 p.a at end of each year
Statement of cash outflow if asset taken on lease
Cash Flow Amount Period Factor 7.5% PV
Lease rent 15,000 1 – 10e 6.864 1,02,960
Tax saving on LR (7500) 1 – 10e 6.864 (51,480)
51,480
2. To acquire asset by borrowing from bank
Cost 1,10,000
Down Payment 10,000
Loan Amount 1,00,000
𝑙𝑜𝑎𝑛 1,00,000
Installment = 𝑓𝑎𝑐𝑡𝑜𝑟
= 5.019
= 19,924

Statement of principal and interest

Instalment Interest Principal Loan O/s Tax sav on Int
1 19,924 15,000 4,924 95,076 7500
2 19,924 14,261 5663 89,413 7131
3 19,924 13,412 6512 82,901 6706
4 19,924 12,435 7489 75,412 6218
5 19,924 11,312 8612 66,800 5656
6 19,924 10,020 9904 56896 5010
7 19,924 8534 11390 45506 4267
8 19,924 6826 13,098 32408 3413
9 19,924 4861 15,063 17345 2431
10 19,924 2579 17,345 - 1290
1,10,000
Depreciation = = 11,000 Tax saving = 5,500
10

Statement of cash outflow (if asset Purchased )

Amount Period Factor PV
Down Payment 10,000 0 1 10,000
Installment 19,924 1-10e 6.864 1,36,758
Tax saving on Interest 7500 1e 0.930 (6975)
7131 2e 0.866 (6175)
6706 3e 0.805 (5398)
6218 4e 0.749 (4657)
5656 5e 0.697 (3942)
5010 6e 0.648 (3246)
4267 7e 0.602 (2569)
3413 8e 0.561 (1915)
2431 9e 0.522 (1269)
1290 10e 0.485 (626)
Tax saving on depn 5500 1 – 10e 6.864 (37,752)
Salvage value 10,000 10e 0.485 (4850)
67,386
Since pv of cash outflow is lower if asset taken on lease so lease option is better.

36
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Q29 Company is considering to acquire asset costing Rs 5,00,000

Company has 2 options
1. To acquire asset on lease
Company will pay annual Lease Rent of Rs 1,00,000 p.a at the end of each year.

Statement of Cash outflow (if asset taken on lease)

Lease Rent 1,00,000 1 – 4e 3.143 3,14,300
Tax saving 35,000 1 – 4e 3.143 (1,10,005)
PV of Cash Outflow 2,04,295

2. To acquire asset by borrowing from bank

5,00,000
Annual Instalment = 2.798
= 1,78,699

Statement of Principal and interest

Installment Interest Principal Loan O/S

1,78,699 80,000 98,699 4,01,301
1,78,699 64,208 1,14,491 2,86,810
1,78,699 45,890 1,32,809 1,54,001
1,78,699 24,698 1,54,001 -

5,00,000 − 2,00,000
Depn = 4
= 75,000
Taxsaving = 75,000 x 0.35 =26,250

Statement of cash outflow

Installment 1,78,699 1 – 4e 3.143 561651

Tax saving on interest 28,000 1e 0.906 (25,368)
22,473 2e 0.820 (18,428)
16,062 3e 0.743 (11,934)
8644 4e 0.673 (5817)
Taxsaving on depn 26,250 1- 4e 3.143 (82,504)
Salvage value (2,00,000) 4e 0.673 (1,34,600)
2,83,000
Since Present value of cash outflow is lower so asset should be taken on lease

2. Desired rate of return of lessor = 14%

Statement of NPV
Purchase price 5,00,000 0 1 5,00,000
Lease rent (Net of tax) 65,000 1 – 4e 2.914 1,89,410
Taxsaving on depn 26,250 1 – 4e 2.914 76,492
Salvage value 2,00,000 4e 0.592 1,18,400
NPV 1,15,698
Since NPV of proposal is –ve so lease proposal is not viable.

37
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Q30 Company is considering to replace its printers purchased 5 years ago. Company has 2 options.

1. To purchase new printers for 100,00,000. Company will borrow Rs 100,00,000 @ 14%.
Amount borrowed is repayable in 5 equal instalments payable at end of each year.

Amount of instalment x factor = Loan amount

100,00,000
Instalment = = 29,12,904
3.433

Statement of principal and interest

Instalment Interest principal in loan outstanding

Each instalment
29,12,904 14,00,000 15,12,904 84,87,096
29,12,904 11,88,193 17,24,711 67,62,385
29,12,904 9,46,734 19,66,170 47,96,215
29,12,904 6,71,470 22,41,433 25,54,781
29,12,904 3,58,123 25,54,781 -

Statement of cash outflows if new asset are purchased

Particulars Cash flows period factor(14%) Present value

Installments 29,12,904 1-5e 4.100 119,42,906

Tax saving on dep 9,00,000 1-5e 4.100 (36,90,000)

Tax saving on interest 7,00,000 1e 0.935 (6,54,500)

5,94,096 2e 0.873 (5,18,646)

4,73,367 3e 0.816 (3,86,267)

3,35,735 4e 0.763 (2,56,166)

1,79,061 5e 0.713 (1,27,670)

Scrap value 10,00,000 5e 0.713 (7,13,000)

Cash outflows if asset is purchased 55,96,657

38
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Option 2 - To acquire asset on rent

Company will acquire asset at annual rent of 18,00,000 p.a. which will increase by
2,00,000 p.a.
Statement of cash outflows if asset acquired on rent
Particulars cash flows period factor Present value
Rent (net of tax) 9,00,000 1e 0.935 8,41,500
10,00,000 2e 0.873 8,73,000
11,00,000 3e 0.816 8,97,600
12,00,000 4e 0.763 9,15,600
13,00,000 5e 0.713 9,26,900
Cash outflows if asset taken on rent 44,54,600
Since cash outflows are lower if asset is taken on rent, so acquiring asset on rent is best
alternative.
Q31 Company is considering to acquire asset costing Rs 5,00,000
Company has 2 options.

1. To acquire asset on Lease from A

Statement of Cash outflow
Initial Lease Rent 5,00,000 0 1 5,00,000
Annual Lease Rent 21,06,000 1-3e 2.49 52,43,940
Tax saving on Lease Rent 1,50,000 1e 0.91 (1,36,500)
6,31,800 1-3e 2.49 (15,73,182)
40,34,258
40,34,258
Equal Annual Cost = 2.49
= 16,20,184

2. To acquire asset on Lease from B

Statement of Cash Outflow
Initial lease rent 1,00,000 0 1 1,00,000
Annual Lease Rent 19,66,000 1 – 4e 3.170 62,32,220
Tax saving on Lease rent (30,000) 1e 0.91 (27,300)
5,89,800 1 – 4e 3.170 (18,69,666)
44,35,254
44,35,254
Equal Annual Cost = 3.17
= 13,99,134

Since EAC of quote B is lower, so quote B should be accepted.

39
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Q32 Co is considering to purchase asset costing Rs 5,00,000

Co has 2 options

1. To Purchase the asset by borrowing from bank, Co. will pay principal in 5equal installments at
the end of each year.
Statement of principal & Interest

Principal Interest Loan o/s Interest (net of tax)

1,00,000 75,000 4,00,000 52,500
1,00,000 60,000 3,00,000 42,000
1,00,000 45,000 2,00,000 31,500
1,00,000 30,000 1,00,000 21,000
1,00,000 15,000 - 10,500

Statement of Depn
Cost 5,00,000 BV aftr 5 yrs 1,63,840
1 yr 1,00,000 SV 1,63,840
4,00,000 Cap gain Nil
2yr 80,000
3,20,000
3 Yr 64,000
2,56,000
4 yr 51,200
2,04,800
5 yr 40,960

Statement of cash Outflow (if asset Purchased)

Principal 1,00,000 1 – 5e 3.352 3,35,200
Interest (net of tax) 52,500 1e 0.8696 45,654
42,000 2e 0.7562 31,760
31,500 3e 0.6576 20,714
21,000 4e 0.5718 12,008
10,500 5e 0.4972 5221
Tax saving on depn 30,000 1e 0.8696 (26,088)
24,000 2e 0.7562 (18,149)
19,200 3e 0.6576 (12,626)
15,360 4e 0.5718 (8783)
12,288 5e 0.4972 (6110)
Salvage value 1,63,840 5e 0.4972 (81,461)
2,97,340

To acquire asset on lease

Security deposit of lac is to be given to lessor by borrowing from bank@ 15%.
40% security deposit is adjusted with Lease rent.

40
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

Statement of Lease Rent

Lease Rent Adjustment Lease rent paid Lease rent Net of tax
1 1,00,000 40,000 60,000 30,000
2 1,00,000 40,000 60,000 30,000
3 1,00,000 40,000 60,000 30,000
4 1,00,000 40,000 60,000 30,000
5 1,00,000 40,000 60,000 30,000

Statement of Principal and interest

Principal Interest Loan O/s
40,000 75,000 4,60,000
40,000 69,000 4,20,000
40,000 63,000 3,80,000
40,000 57,000 3,40,000
40,000 + 3,00,000 51,000 -

Statement of Cash Outflows

Lease rent Net of tax 30,000 1 – 5e 3.3524 1,00,572
Principal 40,000 1 – 5e 3.3524 1,34,096
3,00,000 5e 0.4972 1,49,160
Security deposit received (3,00,000) 5e 0.4972 (1,49,160)
Interest Net of tax 52,500 1e 0.8696 45,654
48,300 2e 0.7562 36,524
44,100 3e 0.6576 29,000
39,900 4e 0.5718 22,815
35,700 5e 0.4972 17,750
3,86,411

Since cash outflow is lower so asset should be purchased.

Q33 1. Cost of vehicle is 25,00,000

2. Statement of Depreciation
Book Value Depn
1 25,00,000 10,00,000
2 15,00,000 6,00,000
3 9,00,000 3,60,000
4 5,40,000 2,16,000
5 3,24,000 1,29,600
6 1,94,400 77,760 WDV at end of 6th year 1,16,640
Salvage value after 6 years 10,00,000
Tax on capital gain 3,09,176
Net salvage value 6,90824

41
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

1. If expected rate of return is 8% , it implies @ 8% NPV of lease proposal is Nil

Statement of NPV of Lease proposal
Particulars Amount Time Factor Present value
Purchase Price 25,00,000 0 1 (25,00,000)
Lease rent (net of tax) 0.65x 1-6e 4.623 3.005x
Tax saving on Depreciation 3,50,000 1e 0.926 3,24,100
2,10,000 2e 0.857 1,79,970
1,26,000 3e 0.794 1,00,044
75,600 4e 0.735 55,566
45,360 5e 0.681 30,890
27,216 6e 0.630 17,146
maintenance cost (net of tax) 3,25,000 1e 0.926 (3,00,950)
3,44,500 2e 0.857 (2,95,237)
3,65,170 3e 0.794 (2,89,945)
3,79,777 4e 0.735 (2,79,136)
3,94,968 5e 0.681 (2,68,973)
4,10,767 6e 0.630 (2,58,783)
Salvage value (net of tax) 6,90,824 6e 0.630 4,35,219
NPV 0
3.05x - 3050089 = 0
30,50,089
x= = Rs 10,00,029
3.05

Q34 (i) Calculation of Tax Benefit on Depreciation/ Short Term Capital Loss

Year Opening WDV Depreciation Closing WDV Tax Shield

1 10,00,000 2,50,000 7,50,000 82,500
2 7,50,000 1,87,500 5,62,500 61,875
3 5,62,500 1,40,625 4,21,875 46,406
4 4,21,875 1,05,469 3,16,406 34,805
5 3,16,406 2,49,406* - 82,304

(ii) PV of cash outflow under Borrowing Option

Year Investment/Salvage Tax Benefit on Dep./STCL PVF@8.04% PV
0 (10,00,000) - 1.00 (10,00,000)
1 - 82,500 0.925 76,313
2 - 61,875 0.857 53,027
3 - 46,406 0.793 36,800
4 - 34,805 0.734 25,547
5 - 82,304 0.679 55,884
5 67,000 - 0.679 45,493
(7,06,936)

42
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

(iii) PV of cash outflow under Leasing Option

Year Lease Rental after Tax PVAF @ 8.04% PV

1-5 2,70,000(1-0.33) = (1,80,900) 3.988 (7,21,429)

(a) Since PV of cash outflows is least in case of Borrowing option hence it shall be more
advantageous to go for the same.
(b) (i) Sensitivity to Borrowing Rate can be calculated by determining the rate of
borrowing (post tax) at which PV of cash flows shall be equal under both options i.e.
IRR.
Let us discount the cash flow using discount rate of 10%. PV of cash outflow under
Borrowing Option

Year Investment/Salvage Tax Benefit on Dep. PVF@10% PV

0 (10,00,000) - 1.00 (10,00,000)
1 - 82,500 0.909 74,993
2 - 61,875 0.826 51,109
3 - 46,406 0.751 34,851
4 - 34,805 0.683 23,772
5 - 82,304 0.621 51,111
5 67,000 - 0.621 41,607
(7,22,557)

PV of cash outflow under Leasing Option

Year Lease Rental after Tax PVAF@10% PV

1-5 2,70,000(1-0.33) = (1,80,900) 3.79 (6,85,611)

NPV @ 8.04% = 7,06,936 – 7,21,429 = -14,493

NPV @ 10% = 7,22,557 – 6,85,611 = 36,946

− 14493
8.04 + x ( 10 - 8.04 ) = 8.59 %
− 14493 − 36946

Q35 Co is considering to acquire a machine costing Rs 32,00,000

Co has 2 options

1. To acquire Asset on lease. – co will pay annual lease rent of 12,00,000 per year at the
Beginning of each year
Statement of cash outflows
7%
Lease Rent 12,00,000 0 1 12,00,000
12,00,000 1 – 2e 1.808 21,69,600
Tax saving on Lease Rent (3,60,000) 2- 4e 2.624(.935) (8,83,238)
24,86,362

43
CA PRAVIIN MAHAJAN SFM CLASSES 1/30 ,Lalita Park Laxmi Nagar, near
9354 720 515 lalita park gurudwara Metro pillar 24, New Delhi

2. To purchase the asset by payment of Rs 32,00,000 (without borrowing frombank)

Statement of depn
BookValue Depn Tax saving on depn scrap value 5,00,000
1 32,00,000 8,00,000 2,40,000 Book Value 13,50,000
2. 24,00,000 6,00,000 1,80,000 Capital loss 8,50,000
3. 18,00,000 4,50,000 1,35,000 Tax sav on CL 2,55,000
Statement of cash outflows (If asset Purchased)
Cash flow amount Period Factor PV
Purchase Price 32,00,000 0 1 32,00,000
Maintenance cost 2,50,000 1- 3e 2.624 6,56,000
Tax saving on Mc 75,000 2 – 4e 2.624(.935) (1,84,008)
Tax saving on depn 2,40,000 2e 0.873 (2,09,520)
1,80,000 3e 0.816 (1,46,880)
1,35,000 4e 0.763 (1,03,005)
Salvage value 5,00,000 3e 0.816 (4,08,000)
Tax sav on CL 2,55,000 4e 0.763 (1,94,565)
26,10,022
b. (i) Interest payable every six months means that the bank will require 5% every six
months accordingly equivalent annual percentage rate shall be calculated as follows:
[(1.05)2 – 1] x 100 = 10•25%
(ii) Amount of installment shall be A = Rs 32,00,000/7•722 = Rs 4,14,400
Q36 Lease Rent are Break even lease rentals if Present value of cash outflow from lease option
is equal to Present value of cash outflow from purchase option.
Statement of depn
Book value Depn Tax saving on depn
150 37.5 13.125
112.5 28.125 9.843 Book value 47.461
84.375 21.094 7.383 Salvage value 10
63.281 15.82 5.537 capital loss 37.461
47.461 Tax sav 13.11
Statement of cash outflow (if asset is purchased)
Purchase Price 150 0 1 150
Tax saving on depn 13.125 1e 0.877 11.511
9.843 2e 0.769 7.569
7.383 3e 0.675 4.983
5.537 4e 0.592 3.278
Salvage value10 + 37.461 (.35) 23.11 5e 0.519 12
110.659
Statement of cash outflow (in case of lease)
Lease Rent 0.65x 1 – 5e 3.432 2.2308x
110.659
110.659
X = 2.2308
= 49.605

44