Lease Vs Hire Purchase - Which is benefit

I’ll try to work out the lease payments and amortise hire purchase payments and get back to you tomorrow. Besides, this is in the books of lessor and not lessee. 

This analysis needs a lucrative business (if you are using it for cab or transport services.) or else its not a good investment. Another thing is, GST can be included in the minimum lease payments. @ 640000, both projects got positive NPV. LEASING has higher profits. I did add another year to make NPV positive. Overall, it is not a satisfactory to invest in LEASING or HP because like I mentioned earlier, it needs to be profitable and need 5 year time scale to assess NPV. Scrap needs to be added in last year and here, it is in the second. I tried all combinations of depreciation, CF and found out that REVENUE generated must be high from the asset and DCF techniques is not Pragmatic for a predetermined discount rate-5.5%.  Meantime, if your just using it for office purpose, LEASING is cheaper than HP in view of Principal + Interest repayments. 

The format is just a gist and no need to follow it as I calculated at my discretion.

 

Sir, thank you very much for your kind reply

In hire purchase, we have to consider resale value along with depreciation benefit. Resale value approximately Rs. 515000

Is below leyman calculation genuine

Sorry for troubling you

The residual value is used in calculating depreciation for both SLM and WDV methods. According to INDAS, generally when an asset is held for sale, it is not depreciated. Then, it is sold at lower of carrying amount or NRV in all standards like IndAS, AS 10, IFRS 5. The resale value need not be subtracting depreciation. Like mentioned earlier, the asset is sold at cost or NRV, which ever is lower and profit or loss is recognised. The only information regarding HP available in AS 10 is ‘15.1 In the case of fixed assets acquired on hire purchase terms, although legal ownership does not vest in the enterprise, such assets are recorded at their cash value, which, if not readily available, is calculated by assuming an appropriate rate of interest. They are shown in the balance sheet with an appropriate narration to indicate that the enterprise does not have full ownership thereof.’

To be logical, one is not responsible for scrap value when Asset is transferred to another party. Then, HP assets are recognises at cash value on balance sheet. I didn’t knew it was recognised based on the Pv of future instalments as well. So my investment appraisal is wrong above. Here is a very good material which will sort out your problem. https://www.mastermindsindia.com/newfiles/3.%20Hire%20Purchase%20and%20Instalment%20sale%20transactions_2e%20Image.pdf

If your saying resale value of the asset and scrap value to be the same, then the value is based on judgement by auditors. 

To conclude, if your putting the asset to sale, you can’t because you don’t have the ownership rights. If you took the right to sell it to someone, your obligated to sell it at a price that will cover the whole pending instalments. 

Asset value is 100 for ten years

Depreciation is 10₹

Interest is 10%

then principle is 100 and Interest is 100. After five years, Asset is worth 50, you paid 100₹ already as instalments. 

If you put it on sale, NBV is 50, NRV is usually lower than cost for cars assuming 50-selling costs 10₹, AND IF YOU SELL IT for 40₹, you will have to pay the extra 10₹ to the vendor. But depreciation need not be included in the calculation because, as per IndAS depreciation is stopped. You can check out AS non current asset disposal standard if you have the ownership to sell. 

The main problem is, I could not find any rules defined for resale. Txs.

Hi, I have further referred all professional accounting modules and other resources in search of hire purchase system and guess what? This system looks like as if it is lesser prominent. The accounting treatment is similar to leasing. It  is better not to follow this system as this is created to give personal comfort to consumers and besides the capital repayment is higher than asset purchase and tax treatment differs. I included some professional material here and it does not appear like a convenient arrangement to me to hold on to a lease & HP contract until the end of assets useful life not unless the company cannot afford capex. 

All the best: https://www.accaglobal.com/my/en/business-finance/types-finance/hire-purchase.H T M L