NOON BUSINESS SCHOOL

University of Sargodha
Midterm Exam Assignment (Spring 2020)
Program: M.com
Semester: 4th
Course Title & Code: Lease & Insurance Management
Name of Examiner: Haroon Hussain
Assignment Assigned Date: 05-03-2020
Assignment Submission Date: 20-04-2020
Total Marks: 30
Instructions for Students: Students are required to develop a case similar to the sample case which was
developed and solved during the class and is given below in the question paper. Accordingly, students are
required to solve the case study developed by them and submit in soft form at
haroon.hussain@uos.edu.pk not later than 20-04-2020. Your submission should contain a cover page
including your full name, roll number, section (regular or self support). The case studies submitted
without cover page or after the due date would not be considered for evaluation.
.

Sample Case

Mr. Ali is working for a company which requires a Pipe Boring machine costing Rs. 11.4 million. This
machine is expected to have an economic life of 5 years. The management of the company is planning to
borrow the money to finance the acquisition. You are asked by the company management to make an
assessment about the possible cost leasing instead of buying the machine. In this regard, you have to contact
the bank to get the lease details. Suppose, the current borrowing rate is 11.7 percent and the corporate tax rate
is 34 percent. You are informed by the bank representative that company would have to make an annual lease
payment of Rs. 2.47 million.

(I) Based on the above information, what would you like to recommend to your company and why?

(II) While making your assessment, you were informed by the manager that the machine would have an after
tax residual value of Rs. 1.8 million at the end of lease/economic life.

(III)The day you went to the bank to sign the lease agreement, you were informed by the bank representative
that company would have to make lease payments at the start of the year. What would be your decision now?

(IV) In case the cost of leasing exceeds the cost to buy, Bank has an alternative offer for you that it may
decrease annual lease payment to Rs. 2.3 million if your company agrees to pay security deposit of one million
at the time of lease agreement. By considering this offer, will your assessment change? The conditions of lease
payments at the start of year and residual value remain same.

(V) Will your assessment change, if MACRS deprecation method is applicable? In this case, suppose, the
machine falls under three years property class.

(VI) Make a fresh assessment by comparing the lease option with borrow and buy. In this case consider the
following points;

(a) Residual value is pre-tax (b) Lease payment made in advance are pre-paid expenses which we
expire at the end of year when tax will become due. (c) Installment payment to the bank in borrow and buy
option contain interest expense which is tax deductible (show Interest tax shield benefit).