VISHAL ENGINEERING ENTERPRISES CASE SOLUTION

DATA GIVEN

Total Assets 270 Crores

Total Sales 256 Crores
Growth Rate 23%
Cut‐off rate 12%
Option 1
Purchase Price 75 Lakhs
Pre Tax Benefits 18 Lakhs per year
Depreciation 25% WDV
Option 2
Lease Rental 14 Lakhs per year
Maintenance 1.75 Lakhs per year
Post Tax Cost of Borrowing 9.50%
Option3
Hire Purchase Instalment 18.375 Lakhs per year
Interest rate  12%
Useful Life 8 Years

Analysis ‐ Option 1 ‐ Ownership and Operation
Rupees in Lakhs
Sr.  Year
Particulars
No 0 1 2 3 4 5 6 7 8
1 Intial Cost ‐75.000
2 Benefits Received 18.000 18.000 18.000 18.000 18.000 18.000 18.000 18.000
3 Depreciation (WDV @ 25%) 18.750 14.063 10.547 7.910 5.933 4.449 3.337 2.503
4 Tax Sheild On Depreciation (3 x .35) 6.563 4.922 3.691 2.769 2.076 1.557 1.168 0.876
5 Net Salvage value 6.000
6 Post Tax Cash Flow (1+2+4+5) ‐75.000 24.563 22.922 21.691 20.769 20.076 19.557 19.168 24.876
7 Discount Factor @ 12% 1.000 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404
8 Present Value (6/7) ‐75.000 27.510 28.753 30.475 32.680 35.382 38.603 42.374 61.592
TOTAL NPV 222.368

Analysis ‐ Option 2 ‐ Lease Contract
Rupees in Lakhs
Sr.  Year
Particulars
No 0 1 2 3 4 5 6 7 8
1 Intial Cost 75.000
2 Depreciation (WDV @ 25%) 18.750 14.063 10.547 7.910 5.933 4.449 3.337 2.503
Loss of Tax Sheild On Depreciation 
3 (2 x .35) ‐6.563 ‐4.922 ‐3.691 ‐2.769 ‐2.076 ‐1.557 ‐1.168 ‐0.876
4 Lease Payment ‐14.000 ‐14.000 ‐14.000 ‐14.000 ‐14.000 ‐14.000 ‐14.000 ‐14.000
Tax Sheild On Lease Payment 
5 (4 x .35) 4.900 4.900 4.900 4.900 4.900 4.900 4.900 4.900
6 Loss of Slavage Value ‐6.000
7 Post Tax Cash Flow (1+3+4+5+6) 75.000 ‐14.663 ‐12.022 ‐9.791 ‐7.869 ‐6.176 ‐4.657 ‐3.268 ‐7.976
8 Discount Factor @ 9.5% 1.000 0.913 0.834 0.762 0.696 0.635 0.580 0.530 0.484
9 Present Value (6/7) 75.000 ‐16.055 ‐14.415 ‐12.855 ‐11.312 ‐9.723 ‐8.028 ‐6.168 ‐16.485
10 TOTAL NPV ‐ Cash Flow ‐20.043
11 LRt(1‐Tc) ‐9.100 ‐9.100 ‐9.100 ‐9.100 ‐9.100 ‐9.100 ‐9.100 ‐9.100
12 Present value (11/8) ‐9.965 ‐10.911 ‐11.948 ‐13.083 ‐14.326 ‐15.687 ‐17.177 ‐18.809
13 Present Value of lease ‐111.903

FOSSILS 1
 VISHAL ENGINEERING ENTERPRISES CASE SOLUTION

Analysis ‐ Option 3‐ Hire and Purchase

Total Cost 75 Lakhs Life Exp. 8 years

Interest Component 72 Lakhs
Total Cost + interest =  147
Hire Purchase Installment per year 18.375 Lakhs

Rupees in Lakhs
Sr.  Year
Particulars
No 0 1 2 3 4 5 6 7 8
1 Hire Purchase Installment 18.375 18.375 18.375 18.375 18.375 18.375 18.375 18.375
2 Interest Component 16.794 14.567 12.340 10.113 7.887 5.660 3.433 1.206
3 Principal Repayment 1.581 3.808 6.035 8.262 10.488 12.715 14.942 17.169
4 ‐It(1‐Tc) ‐10.916 ‐9.469 ‐8.021 ‐6.574 ‐5.126 ‐3.679 ‐2.231 ‐0.784
5 ‐PRt ‐1.581 ‐3.808 ‐6.035 ‐8.262 ‐10.488 ‐12.715 ‐14.942 ‐17.169
6 Depriciation 18.750 14.063 10.547 7.910 5.933 4.449 3.337 2.503
7 Dt(Tc) 12.188 9.141 6.855 5.142 3.856 2.892 2.169 1.627
8 NSVn 6.000
9 Total (4 to 8) ‐ 6 ‐0.310 ‐4.136 ‐7.200 ‐9.694 ‐11.758 ‐13.502 ‐15.004 ‐10.326
10 Discount Factor @ 9.5% 1.000 0.913 0.834 0.762 0.696 0.635 0.580 0.530 0.484
11 Present Value ‐0.339 ‐4.959 ‐9.454 ‐13.936 ‐18.511 ‐23.274 ‐28.321 ‐21.342
12 Present Value of Hire‐Purchase ‐120.137

Hence from the above we see that the cost of the Hire‐Purchase option in Present value Term is more that that of the leasing option.
So Vishal Enterprises should go for Leasing option instead of Hire Purchase.

Also if the option of Purchasing and Owning the equipment is considered, it has a very favourable NPV and this can be considered
as the best option for Vishal Enterprises.

FOSSILS 2