CMA Final · Strategic Financial Management · Leasing Decisions
A lessor buys equipment for Rs 12,00,000 and leases it for 3 years with annual rentals at the end of each year. The lessor requires a 10% return and the equipment has no residual value. Ignoring tax, what annual rental should be fixed? (PVIFA 10%, 3 years = 2.487)
The annual rental should be about Rs 4,82,509. Since the lessor needs a 10% return and there is no residual value, the rental equals the equipment cost of Rs 12,00,000 divided by the three-year annuity factor of 2.487.
- ARs 4,82,509Correct
- BRs 4,00,000
- CRs 5,02,000
- DRs 2,98,440
Explanation
Rental = cost / PVIFA = 12,00,000 / 2.487 = Rs 4,82,509 (approx). Rs 4,00,000 ignores the required return. Rs 2,98,440 multiplies cost by the factor instead of dividing.
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