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LESSEE ANGLE
1) FINANCIAL EVALUATION
2) EVALUATION OF NON
FINACIAL FACTORS
3) EVALUATION OF LESSOR
FINANCIAL EVALUATION:
THREE MODELS
WEINGARTNER’S MODEL
• Calculate NPV of lease alternative NPV (L)
• Calculate NPV of buy alternative NPV (B)
• Compare both
– If NPV (L) > NPV (B) > 0
• GO FOR LEASE
• Discount rate (k) will be marginal cost of capital
• k = D k D* ( 1 – T ) + E * kE
D+ E D+E
• Where
– KD & KE is marginal cost of debt & equity
– D:E is Debt – Equity mix in target capital structure
– T is tax rate
EQUIVALENT LOAN MODEL /BOWER
MODEL / BHW MODEL
• Inflows 1 yr 2
2 yr 4
3 yr 6
1 2 2 * PVIF(12,1) = 1.79
2 4 4 * PVIF (12,2) = 3.19
3 6 6 * PVIF (12,3) = 4.27
• If the cash flows & time interval both are equal then we
use PVIFA i.e. Present value Interest factor annuity
PRACTICAL PROBLEM
• A loan of 100000/- is to be paid in 5 equated annual
installments .if it carries an interest of 14 % PA , find out
installment ?
• SOLUTION
• EMI * PVIFA (14,5) = 100000
• EMI = 100000 / 3.433 = 29129
• YR EMI INTT PRINCIPLE LOAN O/S
0 100000
1 29129 14000 15129 84871
2 29129 11882 17247 67624
3 29129 9467 19662 47962
4 29129 6715 22414 25548
5 29129 3577 25548 -
PRACTICAL PROBLEM
• A loan of 100000/- is to be paid in 5 equal annual
installments .if it carries an interest of 14 % PA , find out
installment
• SOLUTION
• SOLUTION
• 100000 * 14 % = 14000
• 14000* 5 = 70000
• EMI = 170000 / 5 = 34000
• YR INSTALL INTT PRINCIPLE LOAN O/S
1 34000 14000 20000 80000
2 34000 14000 20000 60000
• 34000 * PVIFA ( i , 5 ) = 100000
• Effective “i” or annual % rate “APR” = 20 %
• On monthly or daily reducing it would be much higher than that
CONCEPT
• Lease rental are either paid in advance or in arrear
• All payment at intervals less than a year are called “annuity payable pthly” where p is frequency during the year
• P is 12 if annuity is monthly or 4 if it is quarterly
= 991
CONTD.
• B)
25 * 12 * PVIF A 12 ( 20,3 )
300 * i PVIFA ( i, n )
d (p)
300 * 1.105 * 2.991
= 992
PRACTICAL PROBLEM
• Investment cost 60 lacs
• Rate of depreciation 40 %
• Useful life 4 years
• Salvage value 5 lacs
• Cost of debt (comparable to lease ) 17%
• Cost of capital 12%
• Tax rate is 46%
• Lease option (payable annually in arrears) 444/1000
• Simple documentation
• Expeditious sanction
• Flexibility in LR