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ON
LEASING
SUBMITTED BY:
NAME: ARNAB KUMAR DEB
SECTION: F1
ROLL NO.: 71
BATCH: PGDM 2016-2018
NEW DELHI INSTITUTE OF MANAGEMENT
Illustration 2.19 (Page no. 2.68)
Consider the following facts:
(A) About the Lessee (Hypothetical Industries LTD.)
Solution:
1) Present value of lease rentals:
= 1200000 * PVIFAm (17, 5)
= 1200000 * 1.09 * 3.199
= Rs. 41.84 L
2) Present value of tax shield on lease rentals:
= 1200000 * PVIFA (14, 5) * 0.35
= 1200000 * 3.433 * 0.35
= Rs. 14.42 L
3) Present value of tax shield forgone on depreciation:
= [400 * PVIF (14, 1) + 240 * PVIF (14, 2) + 144 * PVIF (14, 3) +
86 * PVIF (14, 4) + 52 * PVIF (14, 5)] * 0.35 = Rs. 248.64
4) Present value of interest tax shield on displaced debt:
= [6.03 L * PVIF (14, 1) + 5.02 L * PVIF (14, 2) + 3.83 L * PVIF
(14, 3) + 2.44 L * PVIF (14, 4) + 0.84 L * PVIF (14, 5) = Rs. 4.75 L
The break even rental is given by the equation: 1000 41.84L + 14.42L 248.64 4.75L = 0
L = Rs. 23.36
Where L represents rental per thousand per month (ptpm)
The break even rental for the lessor can be obtained by the equation:
45.12L 1000 14.772L 252.933 = 0
L = Rs. 24.62 (ptpm)
Minimum Lease Rental of the Lessor = 210 Lakh * 24.62 ptpm = Rs. 5.17 Lakh
Maximum Lease Rental of the Lessee = 210 Lakh * 23.36 ptpm = Rs. 4.91 Lakh
Thus, the break even rental required by the lessor (5.17 lakh) is more than the
maximum rental (4.91 lakh) the lessee is willing to pay. There is a positive
difference / spread and there is a scope for negotiating the lease rental (bargaining
area).
Monthly break even lease rental for the lessee: 218.4 lakh (210 lakh + 4% sales tax) *
0.02336 = Rs. 5.10 lakh
Monthly break even rental for the lessor: 221 lakh (210 lakh + 0.10 sales tax) *
0.02462 = Rs. 5.44 lakh
The spread is positive and there is a room for negotiation of a lease package
financially attractive to the lessor and the lessee.