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    Question

    Company considers leasing equipment (annual lease ₹12

    lakh for 5 years) vs buying at ₹45 lakh financed at 10% loan. Tax rate = 30%. Equipment depreciated straight-line over 5 years, nil residual. How should the company decide?
    A Always lease—it avoids debt. Correct Answer Incorrect Answer
    B Compare PV of after-tax lease rentals with PV of loan payments and depreciation tax shield; choose cheaper option. Correct Answer Incorrect Answer
    C Buy because depreciation gives tax benefit. Correct Answer Incorrect Answer
    D Lease because payments are tax deductible. Correct Answer Incorrect Answer
    E Both are same in PV terms under tax neutrality. Correct Answer Incorrect Answer

    Solution

    Lease vs buy requires computing PV of after-tax cash flows. Lease: rentals × (1–tax). Buy: loan repayments net of tax + depreciation shield. The cheaper PV option is preferred.

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