What will be the minimum annual lease rent

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Maximum sports manufacturing requires a new drilling machine for its operations It has an option to either buy the machine or lease the machine from Kanpur lease and finance limited. You are the finance manager at Kanpur Lease and Finance limited. The cost of machine for you is INR 100,000 and the estimated total life of machine is 5 years. The machine will be leased for a period of 5 years and the residual (salvage) value at the end of 5-year will be NIL. Kanpur lease and Finance Limited can claim depreciation for this machine on a straight line basis at 12.5% per year. The cost of debt for Kanpur lease and finance limited is 10% and effective tax rate is 20%. The owners of maximum sports manufacturing and your company are close friends and golf partners.

Problem 1: What will be the minimum/breakeven annual lease rent that you should charge Maximum Sports Manufacturing to have zero NPV from this transaction. Assume that the lease rental is paid in advance (and not in arrears).

Reference no: EM132950187

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