CMA Final · Strategic Financial Management · Leasing Decisions
A lessor buys equipment for Rs 6,00,000 and leases it for 4 years at a year-end rental of Rs 1,89,720. The equipment has no residual value and there are no taxes. The present value annuity factor at 10% for 4 years is 3.1699. What is the lessor's NPV at a 10% required return?
The lessor's NPV is approximately zero because the rentals are set so their present value at 10% equals the Rs 6,00,000 cost. The lease therefore yields the lessor exactly its required 10% return.
- ARs 0Correct
- BRs 1,89,720
- CRs 15,000
- DRs (60,000)
Explanation
PV of rentals = 1,89,720 x 3.1699 = 6,00,000 approx (1,89,720 x 3.1699 = 6,01,400 roughly; the rental is set as 6,00,000/3.1699 = 1,89,281). Treating the rental as the one that equates PV with cost, NPV is about nil, meaning 10% is the lessor's implicit rate.
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