Hire Purchase Vs. Leasing

Hire Purchase vs. Leasing Depreciation – could be claimed by hirer but not by lessee Tax benefit – only interest part is deductible expense and not principle. Whole of lease rental is deductible. Salvage value – Hirer get the benefit of salvage value but not lessee

1

Hire Purchase vs. Leasing Valuation Calculation of Net Advantage of leasing H-P = Investment outlay – present value of tax shield on depreciation – present value of tax shield on interest – present value of net salvage value. Leasing = Present value of lease rental – present value of tax shield on lease rental .

2

Calculation of Net Advantage of leasing Investment outlay – present value of tax shield on depreciation – present value of tax shield on interest – present value of net salvage value – Present value of lease rental + present value of tax shield on lease rental .

3

Criteria If NAL is negative, the lease is not financially advantageous and company should not opt for it.

4

5