CMA Final · Strategic Financial Management · Leasing Decisions
Kaveri Textiles considers buying a machine costing ₹10,00,000 with 5-year life and nil salvage value, or leasing it. Depreciation is straight-line and allowed for tax; tax rate is 30%. Discount rate is 10%. PV annuity factor for 5 years at 10% is 3.791. What is the present value of the depreciation tax shield if the machine is purchased (nearest rupee)?
The present value of the depreciation tax shield is ₹2,27,460. Yearly depreciation is ₹2,00,000, giving a tax saving of ₹60,000 at 30%, and discounting this for five years at 10% with a factor of 3.791 gives that figure.
- A₹2,27,460Correct
- B₹7,58,200
- C₹6,00,000
- D₹3,79,100
Explanation
Annual depreciation = 10,00,000 / 5 = 2,00,000. Tax shield = 2,00,000 × 0.30 = 60,000 a year. PV = 60,000 × 3.791 = 2,27,460. Option ₹6,00,000 is the undiscounted total of the shields (60,000 × 5 would be 3,00,000 so it is also wrong), and ₹3,79,100 omits the tax rate.
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