question archive A bank customer requests financing for five air conditioning units (A/Cs) on a three-year lease from the bank

A bank customer requests financing for five air conditioning units (A/Cs) on a three-year lease from the bank

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A bank customer requests financing for five air conditioning units (A/Cs) on a three-year lease from the bank. The bank buys the assets and leases them for three years. Financial details US$ Cost of A/Cs 10,000 Five-year life – annual depreciation 2000 p.a. Insurance (Takaful) 600 p.a. Profit required by the bank Year 1 900 Year 2 700 Year 3 500

Use proper method to find the yearly Ijara rental the bank will charge in order to cover the costs and to make the required profit?

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Answer:

               
Year Cash Outflow Insurance Required
Profit
Tax sheild Net
Cashflow
PVF @
10 %
Discounted
Cashflow
(a) (b) (c ) (d) (e ) (f=b+c+d-e) (g ) (h=f x g)
0 10000                  -                    -                    -             10,000 1           10,000
1                -   600 900 -600                 900      0.9091                 818
2                -   600 700 -600                 700      0.8264                 579
3                -   600 500 -600                 500      0.7513                 376
4                -   600 0 -600                    -        0.6830                    -  
5                -   600 0 -600                    -        0.6209                    -  
          Present Value of cost           11,772
               
Yearly Rent = Present value of cost/ PVFIA @ 10%, n=3      
Yearly Rent = 11,772/ 2.4869 =           4,734        
               
WN:              
(1) It is assumed:            
(i) Cost of capital 10%          
(ii) Tax Rate 30%.            
(2) Tax sheild on depreciation (2000* 30%) = $ 600