CMA Final · Strategic Financial Management · Leasing Decisions
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 value. At a discount rate of 10%, annuity factor is 3.79. The lessor's rate of return is therefore:
The lessor's return is 10%. At that rate the present value of five year-end rentals of ₹1,00,000, using the factor 3.79, equals the investment of ₹3,79,000, so net present value is zero and 10% is the implicit rate in the lease.
- A10%Correct
- B20%
- C26.4%
- D5%
Explanation
The present value of 1,00,000 for 5 years at 10% is 3,79,000, which equals the investment, so NPV is zero and the implicit rate is 10%. The 20% figure comes from dividing a rental by cost without discounting.
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