CMA Final · Strategic Financial Management · Leasing Decisions
Sundaram Textiles leases a machine from Kaveri Leasing for 4 years at an annual rent of Rs 2,50,000 payable at the end of each year. The lessee's after-tax cost of debt is 8%. Ignoring tax effects on rentals, what is the present value of the lease rentals? (PVIFA at 8% for 4 years = 3.312)
The present value of the rentals is Rs 8,28,000. Rentals are an ordinary annuity of Rs 2,50,000 for four years, discounted at the 8% after-tax debt cost using the annuity factor of 3.312, giving 2,50,000 multiplied by 3.312.
- ARs 8,28,000Correct
- BRs 10,00,000
- CRs 7,94,880
- DRs 8,94,240
Explanation
PV of rentals = 2,50,000 x 3.312 = Rs 8,28,000. Rs 10,00,000 simply adds the rentals without discounting. Rs 7,94,880 wrongly uses a factor of 3.1795, and Rs 8,94,240 uses a beginning-of-year (annuity due) factor of 3.577.
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