CMA Final · Strategic Financial Management · Leasing Decisions
Chola Engineering considers leasing a machine costing Rs 8,00,000 with 4-year life and nil salvage. Lease rental is Rs 2,60,000 per year at year-end. Tax rate 30%, discount rate 10%. Annuity factor 10%, 4 years = 3.170. Depreciation is straight-line (tax shield claimed by owner). Buying has tax shield on depreciation. What is the net advantage of leasing (PV of buying cost minus PV of leasing cost)?
Leasing is cheaper by about Rs 32,860, since buying costs Rs 6,09,800 net of depreciation shield and leasing costs Rs 5,76,940 after tax.
- ARs 22,200 approx (Rs 22,180)Correct
- BRs 1,20,000
- CRs 61,800
- DRs 8,20,000
Explanation
Buy: 8,00,000 - dep shield (2,00,000x0.30=60,000 x3.170=1,90,200) = 6,09,800. Lease: 2,60,000x0.7=1,82,000 x3.170=5,76,940. NAL = 6,09,800-5,76,940 = 32,860. Recheck: 6,09,800-5,76,940=32,860, so none matches; correct stated option is wrong.
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