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CMA Final · Strategic Financial Management · Leasing Decisions

Gopal Engineering considers leasing equipment costing ₹10,00,000 for 4 years with year-end rentals of ₹3,00,000. Under the alternative of borrowing and buying, the equipment would be depreciated straight-line to nil over 4 years, no salvage value. Tax rate 30%, after-tax cost of debt used as discount rate is 10%. Using the lease-versus-buy approach, what is the present value of the lease outflow (after tax)? (PVIFA 10%, 4 years = 3.170)

The lease outflow after tax is the rental of ₹3,00,000 reduced by 30% tax, giving ₹2,10,000 a year. Discounted for four years at 10% using the annuity factor 3.170, the present value is ₹6,65,700.

  1. A₹6,65,700Correct
  2. B₹9,51,000
  3. C₹2,85,300
  4. D₹6,65,700 less ₹2,37,750

Explanation

After-tax rental = 3,00,000 × 0.70 = ₹2,10,000. PV = 2,10,000 × 3.170 = ₹6,65,700. The ₹9,51,000 figure ignores the tax shield on rentals; depreciation shield belongs to the buy alternative, not the lease outflow.

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