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
Subject:AccountingPrice:2.87 Bought7
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 | |||||||
