XYZ Ltd. requires an equipment costing Rs 10,00,000; the same will be utilized over a period...

 

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XYZ Ltd. requires an equipment costing Rs 10,00,000; the same will be utilized over a period of 5 years. It has two financing options in this regard : (i) Arrangement of a loan of Rs 10,00,000 at an interest rate of 13 percent per annum; the loan being repayable in 3 equal year end installments; the equipment can be sold at the end of third year for Rs 1,00,000. Leasing the equipment for a period of three years at an early rental of Rs 5,50,000 payable at the year end. (ii) The rate of depreciation is 40 percent on Written Down Value (WDV) basis, income tax rate is 35 percent (paid one year in ad ce) and discount rate is 12 percent. Advise which of the financing options should XYZ Ltd. exercise and why? XYZ Ltd. requires an equipment costing Rs 10,00,000; the same will be utilized over a period of 5 years. It has two financing options in this regard : (i) Arrangement of a loan of Rs 10,00,000 at an interest rate of 13 percent per annum; the loan being repayable in 3 equal year end installments; the equipment can be sold at the end of third year for Rs 1,00,000. Leasing the equipment for a period of three years at an early rental of Rs 5,50,000 payable at the year end. (ii) The rate of depreciation is 40 percent on Written Down Value (WDV) basis, income tax rate is 35 percent (paid one year in ad ce) and discount rate is 12 percent. Advise which of the financing options should XYZ Ltd. exercise and why?

Answer rating: 100% (QA)

To determine which financing option is more advantageous for XYZ Ltd we need to compare the cash flows associated with each option and calculate their ... View the full answer