CMA Final · Strategic Financial Management · Leasing Decisions
Kaveri Pumps Ltd. is considering leasing equipment costing ₹10,00,000 against buying it. Under the lease, annual rentals of ₹2,50,000 are paid at the end of each of 4 years. The tax rate is 30% and the after-tax cost of debt used for discounting is 8%. Ignoring depreciation and other effects, what is the present value of the after-tax lease rental outflows? (PV annuity factor for 4 years at 8% = 3.312)
The present value is ₹5,79,600. The rental is tax-deductible, so the after-tax outflow is 2,50,000 times 0.70, or ₹1,75,000 a year, and discounting it at 8% for four years with factor 3.312 gives this value.
- A₹5,79,600Correct
- B₹8,28,000
- C₹2,48,400
- D₹7,50,000
Explanation
After-tax rental = 2,50,000 x (1 - 0.30) = 1,75,000. PV = 1,75,000 x 3.312 = ₹5,79,600. Using the pre-tax rental gives ₹8,28,000, which ignores the tax shield on rentals.
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