Decision Making between Buying and Leasing

Determination of Interest and Principal Component of

Loan
year
Interest

1200000
8
0.14

Instalment
Cost of debt(AT)

Rs258,684.03
0.07

year

Instalment
1
2
3
4
5
6
7
8

Loan at the beginning

Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03

Rs1,200,000.00
Rs1,109,315.97
Rs1,005,936.18
Rs888,083.22
Rs753,730.84
Rs600,569.13
Rs425,964.77
Rs226,915.81

Total Value of the Asset

Life of the Asset(in Years)
Dep(St. Line Method)
Tax Rate
Depreciation per Year

Interest
Rs168,000.00
Rs155,304.24
Rs140,831.07
Rs124,331.65
Rs105,522.32
Rs84,079.68
Rs59,635.07
Rs31,768.21

1200000
8
150000
50%
75000

PV of cash outflows under buying alternative

Tax Advantage on

Years

Loan Instalment
1
2
3
4
5
6
7
8

Interest

Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03
Rs258,684.03

Depreciation
Rs84,000.00
Rs77,652.12
Rs70,415.53
Rs62,165.83
Rs52,761.16
Rs42,039.84
Rs29,817.53
Rs15,884.11

75000
75000
75000
75000
75000
75000
75000
75000

Total PV

PV of Cash out flows under Leasing alternative

Lease Rent
Cost of Debt(After Tax)
No of Years

Rs258,684.03
0.07
8

After tax Lease Rent

PV of Lease rent

$129,342.01

Rs772,339.78

So the PV of cash outflow in case of buying alternative is less than the PV of cash outflows in case of leasing, then b

ying and Leasing

d Principal Component of Loan Instalment

Principal

Principal at the end

Rs90,684.03
Rs103,379.79
Rs117,852.96
Rs134,352.38
Rs153,161.71
Rs174,604.35
Rs199,048.96
Rs226,915.81

Rs1,109,315.97
Rs1,005,936.18
Rs888,083.22
Rs753,730.84
Rs600,569.13
Rs425,964.77
Rs226,915.81
Rs0.00

ying alternative
Cash Outflows After Tax

easing alternative

Rs99,684.03
Rs106,031.91
Rs113,268.50
Rs121,518.20
Rs130,922.87
Rs141,644.19
Rs153,866.49
Rs167,799.92

PV
Rs93,162.64
Rs92,612.38
Rs92,460.83
Rs92,705.66
Rs93,346.20
Rs94,383.50
Rs95,820.32
Rs97,661.08

Rs752,152.61

lows in case of leasing, then buying alternative must be choosen