CMA Final · Strategic Financial Management · Leasing Decisions
Kaveri Pharma can buy equipment for ₹10,00,000 or lease it for 4 years at an annual rental of ₹3,00,000 payable at the end of each year. Ignore tax and residual value. The cost of debt is 10%. The PV annuity factor at 10% for 4 years is 3.170. What is the net advantage to leasing (PV of purchase outflow minus PV of lease rentals)?
The net advantage to leasing is ₹49,000. The present value of rentals is ₹3,00,000 times 3.170, or ₹9,51,000, which is below the ₹10,00,000 purchase cost, so leasing saves ₹49,000 in present value terms and is preferable.
- A₹49,000Correct
- B₹(49,000)
- C₹2,00,000
- D₹(2,00,000)
Explanation
PV of rentals = 3,00,000 × 3.170 = 9,51,000. Buying costs 10,00,000 now. Net advantage to leasing = 10,00,000 − 9,51,000 = 49,000 positive, so leasing is preferred. The negative option reverses the sign.
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