Lease financing
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Transcript of Lease financing
Financial Management (MGT-303)
COURTESY OF- KAMRUL, ZONAYED AND FAHAD||DEPARTAMENT OF MANAGEMENT
UNIVERSITY OF DHAKA
1
Financial Management (MGT-303)
COURTESY OF- KAMRUL, ZONAYED AND FAHAD||DEPARTAMENT OF MANAGEMENT
UNIVERSITY OF DHAKA
2
Example 25.1 Follow Page No 25.11 of Khan and Jain Financial Management Book
Present Value of cash outflows under leasing alternative
Given that,
Interest=.20
Tax=.35
After tax the rate of interest = .20 (1-0.35)
= .13
After tax the installation amount = 450000 (1-0.35)
= 292500
Now we know that
Present value of annuity (PVA) = 𝐴
𝑖[1 − (1 + 𝑖)−𝑛]
= 292500
.13[1 − (1 + .13)−5]
= 1028790
Present Value of cash outflows under buying alternative
Schedule of Depreciation
Present Value of Installment
PVA = 𝐴
𝑖[1 − (1 + 𝑖)−𝑛]
1500000 = 𝐴
.20[1 − (1 + .20)−5]
A = 501570
Financial Management (MGT-303)
COURTESY OF- KAMRUL, ZONAYED AND FAHAD||DEPARTAMENT OF MANAGEMENT
UNIVERSITY OF DHAKA
3
Loan Amortization Schedule
Present value of cash outflows under borrowing
Recommendation
The company may go for lease as PV of cash outflows under the leasing option is lower than
under the buying alternative.
Year Installment Beginning
Balance Interest @ 20%
Principal
repayment
Loan
outstanding
at the end of
the year
1 501570 1500000.0 300000.0 201570.0 1298430
2 501570 1298430.0 259686.0 241884.0 1056546
3 501570 1056546.0 211309.2 290260.8 766285.2
4 501570 766285.2 153257.0 348313.0 417972.24
5 501570 417972.2 83594.4 417975.6 -3.312
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