Q.1 Define a lease. How does it differ from a hire purchase and instalment sale?

Lease is a contract between a lessor, the owner of the asset, and a lessee, the user of the asset.
Hire purchase: Hire purchase financing is a popular financing mechanism, especially in certain
sectors of Indian business such as the automobile sector.
Instalment sale is a credit sale and the legal ownership of the asset passes immediately to the
buyer, as soon as the agreement is made between the buyer and the seller

Q.2 What are the myths and advantages of a lease?

Advantage:
Balanced Cash Outflow: The biggest advantage of leasing is that cash outflow or payments
related to leasing are spread out over several years, hence saving the burden of one-time
significant cash payment. This helps a business to maintain a steady cash-flow profile.
Quality Assets: While leasing an asset, the ownership of the asset still lies with the lessor
whereas the lessee just pays the rental expense. Given this agreement, it becomes plausible for a
business to invest in good quality assets which might look unaffordable or expensive otherwise.
Better Usage of Capital: Given that a company chooses to lease over investing in an asset by
purchasing, it releases capital for the business to fund its other capital needs or to save money for
a better capital investment decision.
Myths:
Leasing avoids control of capital spending Another misconception is that leasing does not
need capital expenditure screening as no investments are involved. Since a long-term lease
involves long-term financial commitments, it ought to be screened accordingly, in any good
capital expenditure planning and control system.
Leasing improves performance Another myth is that the return on investment (profits divided
by investment) will increase, since a lease does not appear as an investment on the books or the
balance sheet.

Q.3 “It makes sense for companies that pay no taxes to lease from companies that do”.why?

Q.4 What is the hire purchase financing? How does it differ from the lease financing?
Hire purchase financing is a popular financing mechanism, especially in certain sectors of Indian
business such as the automobile sector. In hire purchase financing, there are three parties: the
manufacturer, the hiree and the hirer. The hiree may be a manufacturer or a finance company.
The manufacturer sells asset to the hiree who loans it to the hirer in exchange for the payment to
be made over a specified period of time.
Hire Purchase Financing • Depreciation Hirer is entitled to claim depreciation tax shield. • Hire
purchase payments Hire purchase payments include interest and repayment of principal. Hirer
gets tax benefits only on the interest. • Salvage value Once the hirer has paid all instalments, he
becomes the owner of the asset and can claim salvage value. Lease Financing • Depreciation
Lessee is not entitled to claim depreciation tax shield. • Lease payments Lessee can charge the
entire lease payments for tax purposes. Thus, he/she saves taxes on the lease payments. • Salvage
value Lessor does not become owner of the asset. Therefore, he has no claim over the asset’s
salvage value.

Q.5 What do you mean by Project Finance?

In project financing, the project, its assets, contracts, inherent economics and cash flows are
separated from their promoters or sponsors, in order to permit credit appraisal and loan to the
project, independent of the sponsors.
Q.6 What are the popular methods of Project financing?
Cost Share Financing or Low interest loan financing. 2. Debts Financing. 3. Equity Financing.

Q.7 Give examples of project financing in India.

Project financing in India is used for both greenfield and brownfield projects in sectors such as:
 Public infrastructure (roads, airports, metro rail and ports, among others).
 Energy (power generation (solar, thermal, wind, hydro), power transmission and so on).
 Construction.
 Manufacturing (cement).
 Education.
 Healthcare.
 Telecommunication.