Time Value of Money

Concept:Compare the present value of lease payments with the purchase price at the borrowing rate.Explanation:Lease: Annual rent ₹2,000 for 5 years.Borrowing rate = 10% p.a.Present value (PV) of lease payments is an annuity of ₹2,000 for 5 years at 10%.PV = $\text{Rs.}2,000 \times [1 - (1.10)^{-5}] / 0.10$ .$(1.10)^{-5} = 0.62092$ .$1 - 0.62092 = 0.37908$ .$0.37908 / 0.10 = 3.7908$ .PV = $₹2,000 \times 3.7908 = ₹7,581.60$ .Purchase price = ₹8,100.Since PV of lease (₹7,582) is less than purchase price (₹8,100), leasing is cheaper.Answer:Leasing is preferable.