Leasing

 Leasing means to use the asset without

owning the asset.
 For which lease rentals are paid by the
lessee to the lessor
 Lessor being the owner of the asset can
get the tax advantage on depreciation.
 Leasing
 The lessee can get the tax advantage on
the rentals paid by him
 However, he will suffer tax disadvantage
on depreciation for not owning the asset.
 The lease rentals payments are spread
over a period of time and will therefore get
the benefit of the time value of money
 Therefore, Net Present value method helps
us in understanding the present value of
the outflows
 AN ILLUSTRATION
Simple example to illustrate the leasing
calculation
XYZ LTD wants to acquire an asset costing
Rs.5,00,000. The life of the asset is five years. It
can either purchase the asset outright for
Rs.5,00,000 or the other option is to acquire it
under a lease agreement on lease rentals of
Rs.1,20,000 per annum payable in advance in
the beginning of the year. The tax rate is 30%.
Depreciation followed is straight line method.
The cost of capital at 10%
Advise whether leasing option is financially
viable or not.
Years Lease Tax Advantage Tax Net Cash P.V of Present
Rentals on Lease Disadvantage flows Re. 1 Values
rentals on (Rs.)
Depreciation
0 1,20,000 1,20,000 1.00 1,20,000

1 1,20,000 36,000 30,000 1,14,000 0.909 1,03,626

2 1,20,000 36,000 30,000 1,14,000 0.826 94,164

3 1,20,000 36,000 30,000 1,14,000 0.751 85,614

4 1,20,000 36,000 30,000 1,14,000 0.683 77,862

5 36,000 30,000 (6,000) 0.621 ( 3,726)

Total Present Values of Cash Outflows 4,77,540