CMA Final · Strategic Financial Management · Leasing Decisions
Anand Ltd can buy an asset for Rs 10,00,000 or lease it for 4 years at Rs 3,00,000 annual rental payable at year-end. Tax rate is 30% and the after-tax cost of debt is 10%. Ignore depreciation tax shield and residual value on the buy side for this comparison of lease cash outflows only. PV annuity factor at 10% for 4 years is 3.170. What is the present value of after-tax lease rentals?
The present value of after-tax lease rentals is Rs 6,65,700. Each Rs 3,00,000 rental costs Rs 2,10,000 after 30% tax saving, and discounting this for four years at 10% with an annuity factor of 3.170 gives that figure.
- ARs 6,65,700Correct
- BRs 9,51,000
- CRs 3,00,000
- DRs 8,00,000
Explanation
After-tax rental = 3,00,000 x (1-0.30) = 2,10,000. PV = 2,10,000 x 3.170 = Rs 6,65,700. Rs 9,51,000 ignores tax savings on rentals.
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