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CMA Final · Strategic Financial Management · Leasing Decisions

Meera Industries evaluates a finance lease from the lessor's perspective. Equipment cost is Rs 8,00,000, lease term 4 years, annual rentals Rs 2,40,000 payable at the end of each year, and a guaranteed residual value of Rs 80,000 at the end of year 4. Ignoring tax, which is the lessor's approximate IRR bracket? (Use trial: at 15% PV = 2,40,000x2.855+80,000x0.572 = 7,30,960; at 10% PV = 2,40,000x3.170+80,000x0.683 = 8,15,440)

The IRR lies between 10% and 15%, nearer 10%. At 10% the inflows are worth Rs 8,15,440, above the Rs 8,00,000 cost, and at 15% only Rs 7,30,960. Interpolation gives roughly 10.9%.

  1. ABetween 10% and 15%, nearer 10%Correct
  2. BBetween 10% and 15%, nearer 15%
  3. CAbove 15%
  4. DBelow 10%

Explanation

At 10% PV is 8,15,440, above cost 8,00,000; at 15% PV is 7,30,960, below cost. So IRR lies between 10% and 15%. Interpolation: 10 + 5 x (15,440/84,480) = about 10.9%, nearer 10%.

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