Financial Management (MGT-303)

COURTESY OF- KAMRUL, ZONAYED AND FAHAD||DEPARTAMENT OF MANAGEMENT

UNIVERSITY OF DHAKA

1

Financial Management (MGT-303)

COURTESY OF- KAMRUL, ZONAYED AND FAHAD||DEPARTAMENT OF MANAGEMENT

UNIVERSITY OF DHAKA

2

Example 25.1 Follow Page No 25.11 of Khan and Jain Financial Management Book

Present Value of cash outflows under leasing alternative

Given that,

Interest=.20

Tax=.35

After tax the rate of interest = .20 (1-0.35)

= .13

After tax the installation amount = 450000 (1-0.35)

= 292500

Now we know that

Present value of annuity (PVA) = 𝐴

𝑖[1 − (1 + 𝑖)−𝑛]

= 292500

.13[1 − (1 + .13)−5]

= 1028790

Present Value of cash outflows under buying alternative

Schedule of Depreciation

Present Value of Installment

PVA = 𝐴

𝑖[1 − (1 + 𝑖)−𝑛]

1500000 = 𝐴

.20[1 − (1 + .20)−5]

A = 501570

Financial Management (MGT-303)

COURTESY OF- KAMRUL, ZONAYED AND FAHAD||DEPARTAMENT OF MANAGEMENT

UNIVERSITY OF DHAKA

3

Loan Amortization Schedule

Present value of cash outflows under borrowing

Recommendation

The company may go for lease as PV of cash outflows under the leasing option is lower than

under the buying alternative.

Year Installment Beginning

Balance Interest @ 20%

Principal

repayment

Loan

outstanding

at the end of

the year

1 501570 1500000.0 300000.0 201570.0 1298430

2 501570 1298430.0 259686.0 241884.0 1056546

3 501570 1056546.0 211309.2 290260.8 766285.2

4 501570 766285.2 153257.0 348313.0 417972.24

5 501570 417972.2 83594.4 417975.6 -3.312

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