CMA Final · Strategic Financial Management · Leasing Decisions
A lessor, Narmada Leasing Ltd., buys equipment for ₹5,00,000 and leases it for 5 years at an annual rental payable at year-end. The lessor requires a 12% return and expects no residual value. PV annuity factor for 5 years at 12% is 3.605. What is the minimum annual rental (ignoring tax), to the nearest rupee?
The lessor needs rentals whose present value at 12% equals the ₹5,00,000 cost. Dividing 5,00,000 by the 5-year annuity factor of 3.605 gives about ₹1,38,696 per year, assuming no residual value and year-end payments.
- A₹1,38,696Correct
- B₹1,00,000
- C₹1,80,250
- D₹1,66,667
Explanation
Minimum rental = 5,00,000 / 3.605 = ₹1,38,696. Dividing by 5 and adding no interest gives ₹1,00,000, which ignores the required return. Multiplying cost by the factor gives an absurd figure.
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