CA Intermediate · Financial Management and Strategic Management · Types of Financing
A firm buys machinery on a finance lease. The lessee will pay ₹2,00,000 annually at the end of each year for 3 years, and the lessee's cost of borrowing is 10%. The present value annuity factor for 3 years at 10% is 2.487. What is the present value of the lease rentals?
The present value of the lease rentals is ₹4,97,400, found by multiplying the annual rental of ₹2,00,000 by the 3-year, 10% annuity factor of 2.487. Adding the rentals without discounting gives ₹6,00,000, which ignores time value.
- A₹4,97,400Correct
- B₹6,00,000
- C₹5,48,000
- D₹4,48,200
Explanation
PV of rentals = 2,00,000 × 2.487 = 4,97,400. Simply adding the rentals gives 6,00,000, which ignores the time value of money. The other values do not follow from the given data.
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