Page 150 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 6

Lease asset

PV of lease payments (discounted as a four year annuity at 8%) is:

–40,000 × 3.312 = ($132,480)

PV of tax relief on lease payments (discounted as an annuity from year 2 to
year 5 at 8%) is:

33% × 40,000 × 3.312 × 0.926 = $40,483

So overall PV of leasing is $40,483 – $132,480 = ($91,997)

Decision: On purely financial grounds it is better (cheaper) to lease rather than
buy the asset.

142