CMA Final · Strategic Financial Management · Leasing Decisions
Sundaram Ltd leases equipment for 5 years at an annual lease rental of ₹2,40,000 payable at the end of each year. The tax rate is 25% and the lessee's after-tax cost of debt is 9%. The lessee can claim the full rental as a tax-deductible expense. The PV annuity factor for 5 years at 9% is 3.890. What is the present value of the after-tax lease rentals (rounded to nearest rupee)?
The present value is ₹7,00,200. The rental is tax deductible, so the after-tax outflow is ₹1,80,000 a year, discounted at the after-tax cost of debt of 9% using the factor 3.890. Ignoring the tax shield would overstate the cost at ₹9,33,600.
- A₹7,00,200Correct
- B₹9,33,600
- C₹6,23,400
- D₹5,60,000
Explanation
After-tax rental = 2,40,000 × (1 − 0.25) = 1,80,000. PV = 1,80,000 × 3.890 = 7,00,200. Option ₹9,33,600 ignores the tax shield (2,40,000 × 3.890). Using 25% as the extra deduction wrongly gives other values.
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