CMA Final · Strategic Financial Management · Leasing Decisions
Nilgiri Tools considers leasing a machine costing ₹5,00,000, depreciated by straight line over 5 years to nil salvage value for tax. Lease rental is ₹1,40,000 at the end of each year for 5 years. Tax rate is 30% and the after-tax discount rate is 10% (annuity factor 3.791). Using the lease-versus-buy approach, what is the PV of the after-tax lease rental cost?
The present value of the after-tax lease rental cost is ₹3,71,518. Rental of ₹1,40,000 is tax deductible at 30%, giving ₹98,000 a year, which multiplied by the annuity factor of 3.791 gives ₹3,71,518.
- A₹3,71,518Correct
- B₹5,30,740
- C₹4,14,000
- D₹3,00,000
Explanation
After-tax rental = 1,40,000 × (1 − 0.30) = 98,000. PV = 98,000 × 3.791 = 3,71,518. The option ₹5,30,740 ignores the tax shield on rentals (1,40,000 × 3.791).
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