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CMA Final · Strategic Financial Management · Leasing Decisions

Under a lease-versus-buy analysis, Meera Ltd finds the PV of after-tax cost of leasing is Rs 4,20,000 and the PV of after-tax cost of buying (net of depreciation shield and salvage) is Rs 4,05,000. What is the net advantage of leasing and the decision?

The net advantage of leasing is negative Rs 15,000, so buying is preferred. Leasing costs Rs 4,20,000 in present value while buying costs Rs 4,05,000, and the cheaper alternative should be chosen when the benefits are otherwise equal.

  1. ARs 15,000 in favour of leasing
  2. BRs 15,000 in favour of buyingCorrect
  3. CRs 8,25,000 in favour of buying
  4. DRs 15,000 in favour of leasing as costs are higher

Explanation

Net advantage of leasing = PV cost of buying - PV cost of leasing = 4,05,000 - 4,20,000 = -Rs 15,000. Leasing is costlier, so buying is preferred. Choosing lease confuses the sign of the difference.

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