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¦ iease is a contract under which a lessor, the owner
of the assets, gives right to use the asset to a lessee,
the user of the assets, for an agreed period of time
for a consideration called the lease rentals.
¦ In up-fronted leases, more rentals are charged in the
initial years and less in the later years of the contract.
The opposite happens in back ended leases.
¦ Primary lease provides for the recovery of the cost of
the assets and profit through lease rentals during a
period of about 4 or 5 years. It may be followed by a
perpetual, secondary lease on nominal lease rentals.

BY Akash Saxena
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¦ ºperating iease
¦ Financing iease
¦ Sale and iease Back

BY Akash Saxena
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¦ Shot-term, cancelable lease agreements are
called operating lease.
¦ Tourist renting a car, lease contracts for
computers, office equipments and hotel
rooms.
¦ The iessor is generally responsible for
maintenance and insurance.
¦ Risk of obsolescence remains with the lessor.

BY Akash Saxena
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¦ iong-term, non-cancelable lease contracts
are known as financial lease.
¦ Examples are plant, machinery, land,
building, ships and aircrafts.
¦ Amortise the cost of the asset over the terms
of the lease±Capital or Full pay-out leases.

BY Akash Saxena
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¦ Avoidance of the purchase price.
¦ ioss of depreciation tax shield.
¦ After±tax payments of lease rentals.

BY Akash Saxena


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¦ Sometimes, a user may sell an (existing) asset owned
by him to the lessor (leasing company) and lease it
back from him. Such sale and lease back arrangements
may provide substantial tax benefits.
¦ In April 1989, Shipping Credit and Investment
Corporation of India purchased Great Eastern Shipping
Company bulk carrier, Jag iata, for Rs 12.5 Cr and
then leased it back to GESC on a 5 years lease, the
rentals being Rs 28.13 iakh per month. The ships WDV
was Rs 2.5 Cr.

BY Akash Saxena
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¦ ieveraged iease.
¦ Cross-border lease.
¦ Closed and open ended lease.
¦ Direct lease.
¦ Master lease.
¦ Percentage lease.
¦ Wet and dry lease.
¦ Net net net lease.
¦ Update lease.

BY Akash Saxena
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¦ ieasing Provides 100% Financing
¦ ieasing Provides ºff-the-Balance-Sheet
Financing.
¦ ieasing Improves Performance.
¦ ieasing Avoids Control of Capital Spending.

BY Akash Saxena
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¦ Convenience and Flexibility.
¦ Shifting of Risk of ºbsolescence.
¦ Maintenance and Specialized Services.

BY Akash Saxena
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¦ Equivalent ioan Method.
¦ Net Advantage of a iease Method.
¦ IRR Approach.

BY Akash Saxena
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¦ Ei is that amount of
loan which commits a
firm to exactly the
same stream of fixed
obligations as does the
lease liability.
¦ Method² `
ËË[ 
 

Find out incremental ÿi    
1.  Ë[   Ë[  
cash flows from leasing. [
 
2. Determine the amount of
equivalent loan such
cash flow can service.
3. Compare the equivalent
loan so found with lease
finance.

BY Akash Saxena
A


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¦ The direct cash flow consequences are:
1. The purchase price of the asset is avoided.
2. The depreciation tax shield Is lost.
3. The after tax lease rentals are paid.
¦ The net present value of these cash flows at
after tax cost of debt should be calculated. If
it is positive lease is beneficial.

BY Akash Saxena
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Situation (a) NPV of (b) Net Advantage Decision
Investment of ieasing
1 Positive Positive iease
2 Positive Negative Buy
3 Negative Negative Reject
4 Negative Positive iease if
a>b

BY Akash Saxena
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¦ A lease can benefit both when their tax rate
differs.
¦ ieasing pays if the lessee¶s marginal tax rate
is less than that of the lessor. In fact in a
lease, the lessee sells his depreciation tax
shield to the lessor.
¦ In the absence of taxes it is hard to believe
that leasing would be advantageous if the
capital markets are reasonably well
functioning.
¦ Gain of both is loss to the government in form
of taxes.
BY Akash Saxena
 

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¦ IRR of a lease is that rate which makes NAi
equal to zero.
[
o = Purchase Price.
  = iease Rentals.
  = Depreciation
 = Tax Rate

 = ºperating Cost
 = Salvage Value
`
  
ËË[   Ë
   


 `

`
[ Ë[  Ë[ 
BY Akash Saxena


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¦ The owner of the asset (the Hirer or the
manufacturer) gives the possession of the
asset to the Hirer with an understanding that
the Hirer will pay agreed instalments over a
specified period of time.
¦ The ownership of the asset will transfer to the
hirer on the payment of all instalments.
¦ The Hirer will have the option of terminating
the agreement any time before the transfer of
ownership of assets. ( Cancellable iease)

BY Akash Saxena



Hire Purchase Financing
Hirer is entitled to claim
Depreciation Tax Shield.
Hirer can charge only interest
Portion.
ºnce the hirer has paid all
instalments, he becomes the
owner of the asset and can
claim its salvage value.
BY Akash Saxena
iease Financing
iessee is not entitled to claim
depreciation tax shield.
iessee can charge the entire
lease payments as expense for
tax computation.
iessee does not become the
owner of the asset. Therefore
he has no claim over the asset
salvage value.





¦ Instalment Sale is a credit sale and the legal
ownership of the asset passes immediately to
the buyer as soon as the agreement is made
between the buyer and the seller.
¦ Except for the timing of the transfer of
ownership, instalment sale and hire purchase
are similar in nature.

BY Akash Saxena
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¦ Scheme of financing a particular economic
unit in which a lender is satisfied in looking at
the cash flows and the earnings of that
economic unit as a source of funds, from
which a loan can be repaid and to the assets
of the economic unit as a collateral for the
loan.
¦ It is different from the traditional form of
financing, i.e., the corporate financing or the
balance sheet financing.

BY Akash Saxena
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¦ A separate project entity is created that receives loans
from lenders and equity from sponsors.
¦ The component of debt is very high in project financing.
¦ The project funding and all its other cash flows are
separated from the parent company¶s balance sheet.
¦ Debt services and repayments entirely depends on the
project¶s cash flows. Project assets are used as
collateral for loan repayments.
¦ Project financer¶s risk are not entirely covered by the
sponsors guarantees.
¦ Third Parties like suppliers, customers. government
and sponsors commit to share the risk of the project.

BY Akash Saxena
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¦ The Build ºwn ºperate Transfer Structure.
¦ The Build ºwn ºperate Structure.
¦ The Build iease Transfer Structure.

BY Akash Saxena
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¦ Risks
1. Project Completion Risk
2. Market Risk
3. Foreign Currency Risk
4. Inputs Supply Risk
¦ Risk Mitigation
1. By Government
1. Country Risk
2. Sector Policy Risk
2. By ºthers
1. Commercial Risk

BY Akash Saxena