Corporate Taxation ppt

Purchase by Installments V/s Hire Purchase: 

Purchase by Installments V/s Hire Purchase CASE SUMMARY: A plant is purchased for Rs. 1,00,000 & depreciation rate is 15%. Corporate tax rate is 32.445% & WACOC is 10 % with expected life of 10 years. A loan of Rs. 75,000 can be had by accepting deposits with interest rate of 9 % of financing & deposits can be repaid after 10 years. On the other hand, if asset can be obtained on lease, lease rentals are at the rate of Rs. 34,000 per annum for primary lease period of 5 years. More over, peppercorn rentals of Rs. 600 per annum are to be also paid. A lease management fee is Rs. 1,000 payable on inception of lease.

Solution:: 

Solution: Present Value of outflow of cash when plant is purchased out of owned funds: Present Value of outflow of cash when plant is purchased out of borrowed funds: Present Value of differential cash outflow on leasing with own funds = Rs. 97,482 CONCLUSION: From the above it would be evident that purchased of plant out of borrowed fund is the best alternative. Investment in plant and machinery 1,00,000 Rs. Tax Savings on account of depreciation 17,985 Outflow of cash 82,015 Present worth of total outflow on principal and interest net of tax 81,931 Rs. Present worth of tax savings on account of deduction under sec. 32 17,985 Outflow of cash (net of taxes) 63,946