CMA Final · Strategic Financial Management · Leasing Decisions
Tapi Engineering leases a machine under a finance lease. Fair value is Rs 5,00,000, and the lessor wants a 12% return. Lease term is 3 years with equal annual rentals at year-end and no residual value. The PV annuity factor for 3 years at 12% is 2.402. What annual rental should the lessor charge (nearest rupee)?
The lessor should charge about Rs 2,08,160 per year. Dividing the Rs 5,00,000 fair value by the 3-year, 12% annuity factor of 2.402 gives the level year-end rental that recovers the investment at the required return.
- ARs 2,08,160Correct
- BRs 1,66,667
- CRs 1,86,600
- DRs 2,40,200
Explanation
Rental = 5,00,000 / 2.402 = 2,08,160 (approx). Dividing by 3 gives 1,66,667, ignoring the time value and the required return.
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