Expandable Ltd. is a conglomerate and wants to further expand into the car lease business. For this purpose, they are contemplating to start with only 100 cars each costing INR 20 Lakhs. The company can easily borrow INR 20 crores from a commercial bank at 12% interest per annum to finance the purchase. The loan will have to be repaid in 5 equal annual installments payable at the beginning of each year. In case the company decides with the decision of acquiring the cars, then the depreciation charged on the cars would be 20% per annum as per WDV method. The company will also be able to sell the used cars at the end of 5 years at the rate of INR 2 Lacs each.

But looking at the current pollution levels in Delhi and the vulnerabilities attached with it, the management of Expandable Ltd. would like to contemplate the idea of leasing of cars. If they decide to go in for this arrangement, then they are getting the offer of hiring the cars on lease for a period of 5 years at the rental of INR 5.2 Lacs per annum per car, payable each year in advance.

The company has hired you as their Financial Consultant and seeks your advise to decide on the alternative that they should choose. The tax applicable on the company is 30% and their current post tax cost of capital is 10%. (10 marks)