Lease vs Buy

This topic contains 6 replies, has 3 voices, and was last updated by Avatar of johnmoffat John Moffat 1 year, 4 months ago. This post has been viewed 114 times

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  • Avatar of ahmed555
    ahmed555
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    Sir, in question ASOP the rental payments of $380 0-3 years at a discount factor of 6% is given as 3.673 while the annuity table gives us figure of at year 3 is 2.673 why is it different? And the tax relief in years 2-5 is done at 3.269 when the annuity table gives figure of 4.212 at year 5, I watched your lectures but couldn’t figure out why this is done in this way. If you can explain this briefly..thanx


    Avatar of johnmoffat
    John Moffat
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    The annuity factor in the tables give the total for periods 1 to anything.

    So…in your first example, you want a factor for 0 – 3. The factor for 1 – 3 is 2.673. The factor for 0 is 1, and so the total factor is 1 + 2.673 = 3.673.

    In your second example, you want the factor for 2 – 5. The factor for 1 – 5 (from the tables) is 4.212. If you subtract the factor for 1 year, you will be left with the factor for 2 – 5.


    Avatar of ahmed555
    ahmed555
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    • Topics: 6
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    Got it thank you :)


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    Diny
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    Sir, on this very topic, I came across the question where the lease rental were to be paid in advance and the tax payable one year in arrears. The solution, say 2009 rental was paid in 2008, the tax was claimed in 2010. Is that correct or the tax was supposed to have been claimed in 2009?


    Avatar of johnmoffat
    John Moffat
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    Suppose that the company’s accounting year ends on 31 December.

    If the lease payments are made in advance, then the payment for the year would be made on 1 January 2009.
    The tax saving would be calculated at the end of the accounting year – 31 December 2009, and if the tax is one year in arrears then the tax effect would occur on 31 December 2010.

    The time between the date of the payment (1.1.2009) and the date of the tax effect (31.12.2010) is 2 years (for discounting we are not worried about 1 or 2 days :-) )

    It is only in lease and buy questions that this problem occurs in the exam.
    (If you watch my lecture on lease and buy then it is explained there also).


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    Diny
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    Much, much appreciated!!!


    Avatar of johnmoffat
    John Moffat
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    You are welcome :-)

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