Module: 01 (Simple Lease)

To buy or to lease

Cost of Machine 600000

Life of machine 6
Lease Rentals 140000
Finance Cost 12%
Tax Rate 40%
Depreciation 100000
Decision Lease

Leasing
Years Lease Rentals LR Post Tax NPV-LRPT
0 -140000 -84000 -84000
1 -140000 -84000 -75000
2 -140000 -84000 -66964
3 -140000 -84000 -59790
4 -140000 -84000 -53384
5 -140000 -84000 -47664
6 0 0 0
-386801
 Buying
Asset Cost Depreciation Tax Shield on Dep Cash Flow NPV CF A
-600000 -600000 -600000
0 100000 40000 40000 35714.29
0 100000 40000 40000 31887.76
0 100000 40000 40000 28471.21
0 100000 40000 40000 25420.72
0 100000 40000 40000 22697.07
0 100000 40000 40000 20265.24
-435544
Equivalent Loan Method

Cost of Machine 600000

Life of machine 6
Lease Rentals 140000
Finance Cost 12% 7.2%
Tax Rate 40%
Depreciation 100000
Decision

Leasing
Years Lease Rentals LR Post Tax NPV-LRPT
0 -140000 -84000 -84000
1 -140000 -84000 -75000
2 -140000 -84000 -66964
3 -140000 -84000 -59790
4 -140000 -84000 -53384
5 -140000 -84000 -47664
6 0 0 0
-386801

To go for Buying as 7.2% is less than 8.3% so buy an asset

 Buying
Asset Cost Depreciation Tax Shield on Dep Cash Flow Differential Cash Flow
-600000 -600000 516000
0 100000 40000 40000 -124000
0 100000 40000 40000 -124000
0 100000 40000 40000 -124000
0 100000 40000 40000 -124000
0 100000 40000 40000 -124000
0 100000 40000 40000 -40000

8.30%
Equivalent Loan Method

Cost of Machine 600000

Life of machine 6
Lease Rentals 140000
Finance Cost 12% 7.2%
Tax Rate 40% 8.30%
Depreciation 100000
Decision

Leasing
Years Lease Rentals LR Post Tax NPV-LRPT
0 -140000 -84000 -84000
1 -140000 -84000 -75000
2 -140000 -84000 -66964
3 -140000 -84000 -59790
4 -140000 -84000 -53384
5 -140000 -84000 -47664
6 0 0 0
-386801

To go for Buying as 7.2% is less than 8.3% so buy an asset

 Buying
Asset Cost Depreciation Tax Shield on Dep Cash Flow Differential Cash Flow Principle
-600000 -600000 516000
0 100000 40000 40000 -124000 Rs. -532,070
0 100000 40000 40000 -124000 Rs. -446,379
0 100000 40000 40000 -124000 Rs. -354,518
0 100000 40000 40000 -124000 Rs. -256,044
0 100000 40000 40000 -124000 Rs. -150,479
0 100000 40000 40000 -40000 Rs. -37,313
Interest @ 12% Payment of Principle

Rs. -63,848.41
Rs. -53,565.50
Rs. -42,542.22
Rs. -30,725.26
Rs. -18,057.47
Rs. -4,477.61
Minimum Lease Rental

Cost of Machine 600000

Life of machine 6
Lease Rentals 134730.378
Finance Cost 12% 7.2%
Tax Rate 40% 7.20%
Depreciation 100000
Decision

Leasing
Years Lease Rentals LR Post Tax NPV-LRPT
0 -134730 -80838 -80838
1 -134730 -80838 -72177
2 -134730 -80838 -64444
3 -134730 -80838 -57539
4 -134730 -80838 -51374
5 -134730 -80838 -45870
6 0 0 0
-372242

To go for Buying as 7.2% is less than 8.3% so buy an asset

 Buying
Asset Cost Depreciation Tax Shield on Dep Cash Flow Differential Cash Flow
-600000 -600000 519162
0 100000 40000 40000 -120838
0 100000 40000 40000 -120838
0 100000 40000 40000 -120838
0 100000 40000 40000 -120838
0 100000 40000 40000 -120838
0 100000 40000 40000 -40000
-125029
Leveraged Lease

Cost of Asset 1000000 Year Depriciation

Equity used 200000 1 14.28%
Debt used 800000 2 24.49%
Depriciation period 8 3 17.49%
Term of lease 15 4 12.50%
Life of Asset 16 5 8.92%
Tax Rate 40% 6 8.92%
Interest rate 10% 7 8.92%
Lease Rentals 110000 8 4.48%
Residual Value 300000

Lease
Rentals
Equity Invested at the end of Depreciation
Year
Considering after tax begg of the year the year
inflow and outflow is and
necessary while Salvage
solving cases
0 -200000
1 110000 142800
2 110000 244900
3 110000 174900
4 110000 125000
5 110000 89200
6 110000 89200
7 110000 89200
8 110000 44800
9 110000 0
10 110000 0
11 110000 0
12 110000 0
13 110000 0
14 110000 0
15 110000 0
16 300000
 Division of Instalments

Annual Equated Interest Principle Cash Flow

Installments Amount Repayment to lessor

-200000
Rs. -105,179.02 Rs. -80,000 Rs. -25,179.02 49941
Rs. -105,179.02 Rs. -77,482 Rs. -27,696.92 89774
Rs. -105,179.02 Rs. -74,712 Rs. -30,466.62 60666
Rs. -105,179.02 Rs. -71,666 Rs. -33,513.28 39487
Rs. -105,179.02 Rs. -68,314 Rs. -36,864.61 23827
Rs. -105,179.02 Rs. -64,628 Rs. -40,551.07 22352
Rs. -105,179.02 Rs. -60,573 Rs. -44,606.17 20730
Rs. -105,179.02 Rs. -56,112 Rs. -49,066.79 1186
Rs. -105,179.02 Rs. -51,206 Rs. -53,973.47 -18697
Rs. -105,179.02 Rs. -45,808 Rs. -59,370.82 -20856
Rs. -105,179.02 Rs. -39,871 Rs. -65,307.90 -23231
Rs. -105,179.02 Rs. -33,340 Rs. -71,838.69 -25843
Rs. -105,179.02 Rs. -26,156 Rs. -79,022.56 -28716
Rs. -105,179.02 Rs. -18,254 Rs. -86,924.81 -31877
Rs. -105,179.02 Rs. -9,562 Rs. -95,617.29 -35354
180000
12.46%