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You need an asset fo Rs 15 lakh, whose life is 5 years. Scrap Value of the asset is Rs 1 lakh.

Funding through loan intere


Depreciation charged at 20% by WDV method. Tax rate to be 35%. Cost of capital is 20%. Assume maintainance of machin
Advice which is the better option of financing, leasing

Assumption: The depreciation benefit would be received by the lessor as the tenu
Rs in Lakhs
15

EMI Calculation
Loan Amount
Let the EMI for every year be Rs. X
PVIFA(5, 20%)
x
Discounting Factor
Cost of Capital
Tax rate
After tax cost of debt

2.991
5.015

501504.5

20%
35%
13.00%

Year
1
2
3
4
5

Depreciation Schedule
Initial
Depreciation
Value
Amount
Rate
W.D.V
25% 1500000
375000.00 1125000.00
25% 1125000
281250.00 843750.00
25%
843750
210937.50 632812.50
25% 632812.5
158203.13 474609.38
25% 474609.4
118652.34 355957.03
Scrap Value
100000
Capital Loss
255957.03
Tax Benefit for
Capital Loss
89584.9609
PVIF (13%,5)
0.543
PV(Tax Benefit for
Capital Loss)
PV(Benefit from
Scrap Value)
Loan Amortization Schedule
Value of
machine

Year

1
2
3
4

1500000.00
1298495.00
1056689.00
766521.80

EMI

501505.00
501505.00
501505.00
501505.00

Interest

300000.00
259699.00
211337.80
153304.36

48644.6338
54300

Principal
(EMI Interest)
201505.00
241806.00
290167.20
348200.64

Cash Outflow
Year

418321.16 501505.00

EMI
1
2
3
4
5

Cash Outflow for leasing


Year
1
2
3
4
5

501505.00
501505.00
501505.00
501505.00
501505.00

83183.84

418321.16

Interest Benefit
Depreciation Benefit Cash Outflow
105000
131250 265255.00
90894.65
98437.5 312172.85
73968.23
73828.125 353708.65
53656.53
55371.09375 392477.38
29114.34
41528.32031 430862.34

Cash Outflow PV @ 13% PV (Cash_Outflow)


292500 0.884956
258849.5575
292500 0.783147
229070.4049
292500
0.69305
202717.1725
292500 0.613319
179395.7278
292500
0.54276
158757.2813
1028790.144

Hence the better way of financing is through leasing as the


net cash outflow in leasing is less as compared with that of taking a loan.

1 lakh. Funding through loan interest would be 20% payable in 5 equal EMI. Lease rental of 450000 per year.
%. Assume maintainance of machine will require payment of Rs 30000 per year which will be paid by the lessee.
e better option of financing, leasing or loan.

e received by the lessor as the tenure of life of the machine is very low.

Balance Principal

1298495.00
1056689.00
766521.80
418321.16

83183.84

he
ng a loan.

0.00

PV @ 13%
0.885
0.783
0.693
0.613
0.543
Final Cash Outflow

67187.67

PV(Cash Outflow)
234738.94
244477.13
245137.83
240713.73
233854.81
1198922.45
1095977.81

110000
6.145 17900.73

Year

17900.73
Depreciatio
Initial
n
Value
Amount
Rate
W.D.V
1
25%
110000
27500.00
82500.00
2

25%

82500

3
4
5

25%
61875
25% 46406.25
25% 34804.69

20625.00

61875.00

15468.75
46406.25
11601.56
34804.69
8701.17
26103.52
Scrap Value
20000
capital gain
6103.52
tax benefit
3051.7578
pvif(6,10)
0.588
pv tax benf
5190.0643
pv benft srap 44393.734

emi
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73

5500 dep benefit


5154.9634
13750
4775.4231
4357.9288
3898.6851
3393.517
2837.832
2226.5786
1554.1999
814.58325

Loa
Year

1
2
3
4
5
6
7
8
9
10

Loan Amortization Schedule


Value of
machine

110000.00
103099.27
95508.46
87158.58
77973.70
67870.34
56756.64
44531.57
31084.00
16291.67

EMI

17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73
17900.73

Interest

11000.00
10309.93
9550.85
8715.86
7797.37
6787.03
5675.66
4453.16
3108.40
1629.17

Principal Balance Principal


(EMI Interest)
6900.73
103099.27
7590.81
95508.46
8349.89
87158.58
9184.87
77973.70
10103.36
67870.34
11113.70
56756.64
12225.07
44531.57
13447.58
31084.00
14792.33
16291.67
16271.57
20.10