Hire Purchase

  • July 2020
  • PDF

This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA


Overview

Download & View Hire Purchase as PDF for free.

More details

  • Words: 863
  • Pages: 14
HIRE PURCHASE

PRACTICAL PROBLEM • Tri star chemicals has acquired an equipment of Rs.100 lacs under hire purchase scheme from Synergy finance & has accepted installment of Rs 3, 94,440 per month for 36 months • Calculate flat rate of interest charged by Synergy Finance • Calculate effective rate of interest p.a. implicit in the scheme assuming installments are paid at the end of every month • Tri star follows SOYD for allocating interest charged over three year period. Calculate the interest allocated each year

SOLUTION • Cash price

100 lacs

• Monthly installment

394440

• Total Hire price(36 months)

141,99,840

• Flat rate

= 14199840 – 10000000 = 4199840/10000000 = 42 % = 14 % P.A Or 4199840/3=1399946.667 1399946.667/10000000*100=13.99 or 14%

SOLUTION • Rate of interest implicit in scheme is that rate which would equate the PV of rental to cash price • 394440 * 12* PVIFA p( i , 3) = 10000000 • PVIFA p( i , 3) = 10000000 / 4733280 = 2.1127 • i / i 12 * PVIFA (i,3) = 2.1127 • For i = 0.26 LHS of equation is 2.14 • For i = 0.28 LHS of equation is 2.09 • Interpolating in the range 26 & 28 % • i = 27.42% • If installment are paid in advance , use i /d12 instead i /i12

SOLUTION • An alternative method to trial & approach method is approximation method • i= n .2F n+1 • i = 36/37 * 2 * 14 • i = 27.24% • For advance EMI • i= n .2F n–1

SOLUTION • Year 1 • 36+35+34…..25 = 36+35+34…….1

366 * 4199840 = 2308020 666

• n(n+1) n(n+1) - n ( n + 1) 2 2 2 • 36*37/2 = 666 36*37/2 24*25/2 = 366 • Year 2 • 24+23+22…..13 = 222* 4199840 = 1399947 36+35+34…….1 666 • 24*25/2 – 12*13/2 = 222 • Year 3 • 12+11+10…..1 = 78 * 4199840 = 491873 36+35+34…….1 666

PRACTICAL PROBLEM • Narmada finance offers a Hire purchase plan for corporate borrowers • Rate of interest

13 % flat

• Repayment 3 years monthly in arrear • Down payment

20 %

• Calculate APR (annual percentage rate) by trial error & approximation approach • What would be the answer if payment is in advance

SOLUTION • • • • • • • •

Amount of loan 800 Total charge for credit 800 * 0.13 * 3 = 312 Monthly installment (800 + 312) / 36 = 30.89 (30.89 * 12 ) * PVIFA p (i,3) = 800 i / i 12 * PVIFA (i,3) = 2.158 For i= 24 LHS = 2.191 For i= 26 LHS = 2.143 i= 25.38

• Approximate formula • 36/37 * 2 * 13 = 25.3%

SOLUTION contd. • • • • •

(30.89 * 12 ) * PVIFA p (i,3) = 800 i / d 12 * PVIFA (i,3) = 2.158 For i= 26 LHS = 2.185 For i= 28 LHS = 2.141 i= 27.23%

• Approximate formula • 36/35 * 2 * 13 = 26.74%

CALCULATION OF INTEREST REBATE • Effective rate of interest method • Considering previous illustration if borrower wishes to pay the outstanding loan after paying 24th installment , what would be the interest rebate • Total amount of outstanding installments – discounted value of outstanding installments as on date of payment • 30.89 * 12 = 370.68 (A) • 30.89 * 12 * PVIFA p (25.38,1) (B) • = 328.68 • A – B = 370.68 – 328.68 • = 42

CALCULATION OF INTEREST REBATE • Rule 78 method (prescribed by Hire Purchase Act 1972 (amended) • Considering previous illustration if borrower wishes to pay the outstanding loan after paying 24th installment , what would be the interest rebate • R = t ( t + 1) * D n(n+1) • 12 * 13 * 312 36 * 37 • = 36.54 • Interest rebate under rule 78 is beneficial for lender

PRACTICAL PROBLEM • Considering previous illustration if borrower wishes to pay the outstanding loan after paying 24th installment , calculate effective rate of interest implied in complete transaction in both methods • Under Effective rate of interest method • 30.89 * 12 * PVIFA p (i,2) + (370.68 – 42 ) * PVIF (i,2) = 800 • = 25.38 • Under Rule 78 method (prescribed by Hire Purchase Act 1972 (amended) • 30.89 * 12 * PVIFA p (i,2) + (370.68 – 36.54 ) * PVIF (i,2) = 800 • = 26 • Effective rate in complete transaction is higher & lender gets benefit if he applies Rule 78

COST OF HIRE PURCHASE FOR HIREE Vs COST OF LEASE FOR LESSEE • • • • • • •

Down payment + PV of Hire payments + Service fees - PV of tax shield on charge on credit of HP - PV of tax shield on Service Fees - PV of tax shield on Depreciation - PV of salvage

• • • •

PV OF Lease payments + Lease management fees - PV of tax shield on Lease payments - PV of tax shield on Lease management Fees

COST OF LEASE FOR LESSEE

Related Documents