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CMA Final · Strategic Financial Management · Leasing Decisions

Sunrise Textiles Ltd leases a machine under a finance lease. The lessor, Bharat Leasing, charges annual rentals of Rs 2,00,000 payable at the end of each year for 5 years. Using a lessor's required rate of 10%, what is the present value of the rentals? (PVIFA 10%, 5 years = 3.791)

The present value is Rs 7,58,200, found by multiplying the annual rental of Rs 2,00,000 by the 5-year annuity factor of 3.791 at 10%. Simply adding the rentals ignores the time value of money and overstates the value.

  1. ARs 7,58,200Correct
  2. BRs 10,00,000
  3. CRs 6,20,900
  4. DRs 8,34,010

Explanation

PV of rentals = 2,00,000 x 3.791 = Rs 7,58,200. Rs 10,00,000 simply adds the rentals without discounting. Rs 6,20,900 wrongly uses the PV factor for a single sum (0.621 x 10,00,000 style error).

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