CMA Final · Strategic Financial Management · Leasing Decisions
Sundaram Textiles Ltd. leases a machine under a finance lease. The lessor charges a lease rental of ₹2,00,000 per year for 5 years, payable at the end of each year, and the lessor's implicit rate is 10%. Present value annuity factor for 5 years at 10% is 3.79. What is the fair value of the machine implied by the lease (the lessor's investment), ignoring any residual value?
The implied fair value is ₹7,58,000, because the lessor's investment equals the present value of the five year-end rentals discounted at the implicit rate of 10%: 2,00,000 multiplied by 3.79. Adding rentals without discounting gives a wrong figure.
- A₹7,58,000Correct
- B₹10,00,000
- C₹6,00,000
- D₹8,34,000
Explanation
With no residual value, the lessor's investment equals the present value of rentals at the implicit rate: 2,00,000 x 3.79 = ₹7,58,000. The figure ₹10,00,000 simply adds up the rentals without discounting, which ignores the time value of money.
Did you get it right without looking?
One question tells you little. A timed set on Leasing Decisions shows your real accuracy, how long you take and where you lose marks.
More Leasing Decisions questions
- Which statement about a finance lease versus an operating lease from the lessee's decision viewpoint is correct?
- A lessor buys equipment for Rs 12,00,000 and leases it for 3 years with annual rentals at the end of each year. The lessor requires a 10% re…
- A lessor, Narmada Leasing Ltd., buys equipment for ₹5,00,000 and leases it for 5 years at an annual rental payable at year-end. The lessor r…
- Under a finance lease, the lessor invests ₹3,79,000 in an asset and receives ₹1,00,000 at the end of each year for 5 years with no residual …
- Sunrise Textiles Ltd leases a machine under a finance lease. The lessor, Bharat Leasing, charges annual rentals of Rs 2,00,000 payable at th…
- A lessor buys equipment for Rs 6,00,000 and leases it for 4 years at a year-end rental of Rs 1,89,720. The equipment has no residual value a…