IBFS.D.3.B - Cost of machine Rs 60 lakhs(exclusive of...

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Set-B Name:……………………. Roll No…………………. .… IBFS-D: Internal test-3(Date: 30.8.2008) Total Marks: 15 Time: 45 Minutes Note: Attempt any 2 questions. Each questions carries 7.5 marks. 1. SRIL is contemplating to either Borrow and Buy or take on Lease equipment, the details of which are as follows. Investment cost Rs.72.00 Lakhs. Useful Life 5 years Tax relevant rate of depreciation 25% Estimated salvage value after 5 years Rs.8 lakhs Other Particulars: Cost of Capital 13% Marginal rate of Tax 46% Cost of Debt 16% p.a. Period of Lease 5 years Nature of Lease Full Pay out Lease. Lease Rentals Rs.315 per thousand per annum Frequency of payment Annually in arrears. Advise the Company whether to borrow and buy the equipment or Lease the equipment. (7.5 marks) 2. KPL is considering an investment in a machinery whose details are given below:
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Unformatted text preview: Cost of machine: Rs. 60 lakhs (exclusive of Central Sales Tax of 4%) Life of machinery: 5 years Salvage value: 10% of book value Depreciation on SLM: 10%; Tax relevant depreciation: 10% KPL received a proposal from Avon Lease Ltd (AVL) to either Lease or Hire Purchase the equipment. The lease terms are: 90 ptpq and flat rate of interest in HP transaction is 14%. Both lease and HP rentals are payable quarterly in arrears over a period of 4 years. The marginal cost of debt and equity are 16% and 24% respectively. The debt: equity of KPL is 3:1 and its tax bracket is 40%. KPL allocates interest on SOYD basis in case of hire purchase. Evaluate the three options: Purchase, Lease and Hire-Purchase and determine the option that KPL shall choose, using Weingartner’s model for lease evaluation. 1...
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