Answer to Question #290611 in Financial Math for maliha

Question

King Corporation Limited (KCL), a producer of electricity, is considering to expand its operation by adding 5 generators. The cost of these generators would be Tk. 100 million. The expected life of the generators is 5 years. The addition of these generators will result in cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash inflows. KCL uses straight line method of depreciation and expects no salvage value from the generators at the end their service lives. IDLC, a leading Non-Bank Financial Institution, offered KCL to lease the generators for 5 years. The lease payments to be made at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return is 7%. Tax rate for both KCL and IDLC is 30%.

f. Assume now that KCL’s tax rate is 10% while IDLC’s tax rate remained at 30% and IDLC revises its offer to reduce the lease payments to Tk. 22 million a year.

Answer 1

CONSIDERING THAT THE LEASE IS AN OPERATING LEASE HENCE DELTA WON'T BE ABLE TO CLAIM DEPRECIATION BENEFIT FOR TAXATION PURPOSE. IF YOU WANT TO CONSIDER DEPRECIATION THEN JUST ADD IT TO CASHFLOWS FROM YEAR 1 TO 5

NPV for IDLC if rent is change to 50 million