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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

Sunrise Tubes Ltd. leases a machine costing ₹5,00,000 from a lessor under a finance lease. The lessor wants a uniform annual rental, payable at the end of each of 5 years, and the annuity factor at the lessor's required rate for 5 years is 4.00. The machine has no residual value. What is the annual lease rental?

The annual lease rental is ₹1,25,000. It is found by dividing the machine cost of ₹5,00,000 by the 5-year annuity factor of 4.00, so that the present value of rentals equals the cost. Dividing by 5 years ignores the lessor's required return and gives a wrong figure.

  1. A₹1,00,000
  2. B₹1,25,000Correct
  3. C₹1,50,000
  4. D₹2,00,000

Explanation

Annual rental = Cost / annuity factor = 5,00,000 / 4.00 = ₹1,25,000. Check: 1,25,000 x 4.00 = 5,00,000. Option A simply divides cost by 5 years, ignoring the lessor's required return.

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