An equipment costing ₹ 4,00,000, with a life of 4 years, can be leased for 4 years for payment of ₹ 1,20,000 per year at the end of the year. Alternatively, there is an option to borrow ₹ 4,00,000 and buy the equipment.

Alternative 1- To lease the equipment End of year Annual payment (₹) Tax saving @30% Net cash PVF @ 10% Present value (₹) 1 1,20,000 36,000 84,000 0.9091 76,364 2 1,20,000 36,000 84,000 0.8264 69,418 3 1,20,000 36,000 84,000 0.7513 63,109 4 1,20,000 36,000 84,000 0.6830 57,372 2,66,263 Alternatively, PV of outflow under lease can be calculated as follows: Particulars (₹) Lease rent per year 1,20,000 Less: Tax @ 30% (36,000) After Tax Rent 84,000 PVAF (10%, 4 Years) 3.1699 PV of Outflow 2,66,272 Alternative 2 - To borrow money and own the equipment End of year Principal borrowed outstanding Annual payment Interest payable Depreciation Tax saving @30% on interest and depreciation Net cash PVF @ 10% Present value 0 4,00,000 Nil Nil Nil Nil Nil 1 3,00,000 1,24,000 24,000 1,00,000 37,200 86,800 0.9091 78,910 2 2,00,000 1,18,000 18,000 1,00,000 35,400 82,600 0.8264 68,261 3 1,00,000 1,12,000 12,000 1,00,000 33,600 78,400 0.7513 58,902 4 Nil 1,06,000 6,000 1,00,000 31,800 74,200 0.6830 50,679 2,56,752 Decision: As the present value of borrowing the money and buying the equipment is less than present value of leasing the equipment, therefore the equipment should be bought from borrowed funds.