FIN 304, Capital Budgeting
Group Assignment: Written Assignment
Total Weightings: 50 Marks (scalable) Refer Work Plan for Marking Rubrics]
Word Limit: Maximum 1500 words (Excluding end-text citations and annexure)
Submission Date: 25st October, 2022
Students in groups will analyse two mini cases assigned below towards this assignment from
Lease versus buying decisions (Unit 4).
Include your workings and calculations in an organised manner with a constructive analysis of
each cases report. Use APA 7th Edition for referencing.
Mini Case 1 [30]
Bhutan Ferro Alloys Limited is in need of an equipment for use. It has the option of outright
purchase or leasing the equipment. Data are given below:
Option 1
Purchase outright for a cost of Nu. 8 million. It is to be entirely financed by a term loan @ 18%
p.a. interest on outstanding payable on a yearly basis. The term loan to be repaid in eight equal
instalments of Nu. 1 million each, beginning from second year-end. The economic life of the
equipment is assessed to be ten years. The equipment will be depreciated @ 10% p.a. on straight
line basis, with insignificant salvage value at the end of the economic life? The estimated
maintenance expenses would be as detailed below:
Year 1 2 3 4 5 6 7 8 9 10
MC 4.00 4.40 4.88 5.47 6.18 7.05 8.11 9.41 11.01 13.00
(*) MC – Maintenance cost in ‘Hundred Thousand’
Option 2
The equipment may be leased for a ten-year period. The maintenance of equipment will be done
by the lessor. The lessee has to pay Nu. 18 hundred thousand as annual lease rental at the
beginning of each year over the lease period.
[Note: Assume that the lessee is in a tax bracket of 50% and the average cost of capital of the
lessee firm as 28% p.a.]
Required:
1. Recommend the best option that the factory should choose and justify your selection.
2. In the option 2 above, if the lease rentals are to be paid at the end of each year, how will
this impact your decision?
3. Is the lease option advisable from the lessor’s point of view? Show the relevant workings
to justify your answer.
4. Explain various scenarios pertaining to maintenance cost treatments in lease vs buy
decisions.
Mini Case 2 [20]
A construction company registered under the Companies Act of the Kingdom of Bhutan, 2000
(revised 2016) and a Medium Scale member of the Construction Association of Bhutan has
received some Quotation rates for leasing properties from some leasing companies for 72
months. The proposals for the acquisition of an asset worth Nu 150,000 on a lease from various
leasing companies and its details are as mentioned below.
1. Lease Rates Quoted by Leasing Company LEFT:
The Leasing Company LEFT offer an envisaged payment of rentals for 96 months. During the
first 72 months, the lease rentals are to be paid @ Nu 30 per month per Nu 1000, and during the
remaining 24 months @ Nu 5 per month per Nu 1000. On the expiry of the lease period, the lessor
requires an additional payment of 5% of the original cost.
2. Lease Rates Quoted by Leasing Company RIGHT:
This option from Leasing Company RIGHT envisaged a lease agreement for 72 months during
which the lease rentals are to be paid as follows:
Year 1 2 3 4 5 6
Lease rentals per Nu 1000 per month 35 30 26 24 22 20
3. Lease Rates Quoted by Leasing Company CENTER:
Under this offer by Leasing Company CENTER, a lease agreement is proposed to be signed for
60 months, where an initial lease deposit to the extent of 15% will have to be made at the time of
signing of the agreement. Lease rentals @ Nu 35 per Nu 1000 per month will have to be paid for
60 months. On the expiry of the leasing agreement, the asset will be sold against the initial deposit
and the asset is expected to last for an additional period of 3 years.
You are required to evaluate the proposals keeping in view the following parameters.
a) The institution charges depreciation @ 25% WDV
b) The discounting rate is 15%
c) The applicable tax rate is 40%
