CMA Final · Strategic Financial Management · Leasing Decisions
Vardhan Textiles leases a machine under a finance lease. The lessor charges a flat lease rental of ₹2,40,000 per year for 5 years, payable at the end of each year, and the machine costs ₹8,00,000 with nil residual value. Ignoring tax, what is the total lease rentals paid minus the cost of the machine, i.e. the lessor's total finance charge?
The lessor's total finance charge is ₹4,00,000. Total rentals are ₹2,40,000 multiplied by 5 years, which equals ₹12,00,000, and subtracting the machine cost of ₹8,00,000 leaves ₹4,00,000 as the finance charge over the lease term.
- A₹4,00,000Correct
- B₹3,20,000
- C₹1,60,000
- D₹2,40,000
Explanation
Total rentals = 2,40,000 × 5 = 12,00,000. Finance charge = 12,00,000 − 8,00,000 = 4,00,000. Option ₹3,20,000 wrongly uses 4 years of rentals less cost (9,60,000 − 6,40,000 style error), and ₹1,60,000 is not derived from the data.
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