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Sir,
in the example you worked out in the lecture based on lease vs buy decision…in leasing:A broad calculation or each yr lease payments and the corresponding tax reliefs are deducted to find net cash flow and then discounted it with the df(used pv table).But in the other available questions on lease ,this method gives wrong answer!!!The other way is easier involving annuity factor calculations(using annuity table)!!But i wanted to know whether there is any logic behind these two methods??????????????????Which ‘other available questions’ are you referring to. Whatever method you may choose to use for the discounting, there is only one correct end result and any method will result in the same answer. (I can only guess that you are maybe using annuity factors on lease flows that start at time 0 and not at time 1, in which case, of course, you have to add 1 to the annuity factor).
sir,
In kaplan text 1st qn on lease.Can you solve it using your method!that is using pv!I tried it but got it wrong!!Walshey co has already decided to accept a project and is now considering how to finance it?
The asset could be leased over 4 yrs @ a rental of $36000 pa,payable @ the start of each yr.
Tax is payable @ 30%,one year in arrears. The post tax cost of borrowing is 10%
calculate the npv of the leasing option?
my ans:yr 0 1 2 3 4 5
lease (36000) (36000) (36000) (36000)tax savings 10800 10800 10800 10800
(36000) (36000) (25200) (25200) 10800 10800
df@10% 1 0.909 0.826 0.751 0.683 0.621
pv (36000) (32724) (20815.2) (18925.2) 7376.4 6706.8 ==(94381.2)
BUT the ans is (94406) why so?They no doubt used annuity factors, and as I make clear in my lectures (for MA as well as for FM), there can therefore be rounding errors due to the fact that the tables are only presented to 3 decimal places.
The difference here is 25 and is completely irrelevant both in the exam and in real life 🙂
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