PRESENTATION ON CASE STUDY

Presented by M38B1 A05 A06,A07,A08

INTRODUCTION
y This case is about a Company called Vishal

y y y y y

Engineering Enterprises. It is a medium size company from Engineering Industry Assets of company = Rs 270 crore Sales of company = Rs 256 crore Annual rate of growth = 23% Net present value of the company is positive. After sometime the company decides to use computer for its CAD/CAM function . So buying of computer can be done by two ways :- hire purchase or by leasing

PROBLEM IDENTIFICATION
y Whether lease or hire purchase is good for company to y y

acquire computers? Company is seeing lease as a good option .But there are problems in it . The total cost of computers is Rs 75 lakh and they have a life span of 8 years. Company is required to pay a lease rent of Rs 14 lakh at a beginning of each year for 8 years. One disadvantage of leasing is that the company has to maintain the computer during the lease period which costs about Rs 1.75 lakhs per annum . Also if it leases , they will enjoy the tax benefits from the government.

CASH FLOW UNDER LEASE

y Lease rent = Rs 14 lakh/year y Maintenance = Rs 1.75 lakh/year y After tax cost of borrowing = 9.5% y Now , Cash outflow = Rs 112 lakh for 8 years y Maintenance rent y y y y y

= 1.75*8 = Rs 14 lakh Total outflow = 14+112= Rs 126 lakh Tax benefit on lease = 14*0.35= 4.9 Payment after tax = 14-4.9 = Rs 9.1 lakh So company has a benefit of Rs 4.9 lakh (inflow) Depriciation tax shield is given by 75/8 = 9.375 9.375*0.35 = Rs 3.28 lakh

Q : Is leasing the computer attractive for Vishal? What is the net advantages of lease to the company ? A : Lease rental = Rs 14 lakh Tax shield is = 14*0.35=Rs 4.9 lakh So in this way lease rental is saving the tax of the cmpany , so leasing of the company is attractive . Advantages : Avoiding purchase price . Company can acquire without immediately paying for it . After tax payment Convenience and flexibilty Shifting of risk of obsolessence.

DIFFERENCE
Hire Purchase Financing Hirer is entitled to claim Depreciation Tax Shield. Hirer can charge only interest Portion. Lease Financing Lessee is not entitled to claim depreciation tax shield. Lessee can charge the entire lease payments as expense for tax computation. Lessee does not become the owner of the asset. Therefore he has no claim over the asset salvage value.

Once the hirer has paid all instalments, he becomes the owner of the asset and can claim its salvage value.