CMA Final · Strategic Financial Management · Leasing Decisions
Sundaram Textiles Ltd leases a machine from Kaveri Leasing on a finance lease. The machine's fair value is ₹10,00,000 and the lessor wants a flat annual lease rental, payable at the end of each year for 5 years, to recover the cost at a 10% required return with nil residual value. Annuity factor for 5 years at 10% is 3.7908. What is the approximate annual rental?
The annual rental is about ₹2,63,797. Because the lessor needs to recover ₹10,00,000 over five year-end payments at 10%, the cost is divided by the 5-year annuity factor of 3.7908, not by the number of years alone.
- A₹2,00,000
- B₹2,63,797Correct
- C₹3,00,000
- D₹2,37,974
Explanation
Rental = Cost / annuity factor = 10,00,000 / 3.7908 = ₹2,63,797 approximately. Check: 2,63,797 x 3.7908 = 10,00,000. The ₹2,00,000 option simply divides cost by 5 years, ignoring the time value of money.
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