SMU_MBA
Oct 19, 2008, 10:47 AM
Universal Industries has an investment plan amount to Rs 110 lakh.The tax relevant rate of depreciation of the UIL is 25%,its marginal cost of capital and marginal cost of debt is 15% and 20% respectively and it is in 35% in tax bracket. It is examining financing for its capital expenditure. A proposal from the Universal Finance Ltd (UFL) , with the following salient features, is under its active consideration:
(a) Hire-Purchase plan: The (flat) rate of interest charged by UFL is 15%.Repayment of the amount is to be made in advance, in 36 equated monthly instalments. The Hirer/Hire- Purchaser is required to make down payment of 20%.
(b) Leasing alternatives: Lease rentals are payable Rupees 28 ptpm, in advance. The primary lease period can be assumed to be 5 years. The net salvage value of the equipment after 3 years can be assumed to be rupees 33 lac. Which alternative - Leasing or Hire purchase – should the UIL use? Why? Detailed working should be shown.
(a) Hire-Purchase plan: The (flat) rate of interest charged by UFL is 15%.Repayment of the amount is to be made in advance, in 36 equated monthly instalments. The Hirer/Hire- Purchaser is required to make down payment of 20%.
(b) Leasing alternatives: Lease rentals are payable Rupees 28 ptpm, in advance. The primary lease period can be assumed to be 5 years. The net salvage value of the equipment after 3 years can be assumed to be rupees 33 lac. Which alternative - Leasing or Hire purchase – should the UIL use? Why? Detailed working should be shown.