CPIMR MFS Solution

Q:5 – 1)


Investment made by BOI Finance Ltd. = Rs. 24 Crores

Cost of capital for BOI Finance Ltd. = 16% ( i.e. 14% + 2% )

We assume that BOI Finance Ltd. will want to simply recover its cost of capital – 16% by the lease transaction. Further, the tenure of lease can be assumed to be 5 years. Suppose, BOI Finance Ltd. charges an annual lease amount of Rs. X, then –

X * PVIFA(16%, 5 years) = Rs. 24 Crores

Hence, X = 7.33 Crores

Thus, every year BOI will have to pay Rs. 7.33 Crores as lease payment. It will have to charge an annual amount of Rs. Y such that it earns a profit of 15%. Hence –

(Y – 7.33)*0.7 = 0.15*7.33

So, Y = 8.90 Crores

Thus, BOI will need to charge Rs. 8.90 Crores annually to its customers.



Q:1)

Suppose Factoring services are not availed. In that case, the total cost is –

• Bad debt loss = 1% of 1000 lacs = 10 lacs

• Discount expense = 1000 lacs * 0.5 * 2% = 10 lacs

• Funds blocked as creditors = 500 lacs * 45 / 365 = 61.64 Lacs

• % Cost of funds = 2*18/3 + 1*15/3 =17 %

• Cost of blocked funds = 61.64*17% = 10.48 Lacs

• Thus total cost = 10 + 10 + 10.48 = 30.48 Lacs

If the factoring services are availed, the total cost is –

• Commission expense = 3% of 1000 lacs = 30 lacs

• Funds blocked as creditors = 1000 lacs * 24 / 365 * 17% = 11.18 lacs

• Discount charges = (61.64 – 11.18)*0.20*0.85 = 8.58 lacs

• Thus total cost = 30 + 11.18 + 8.58 = 49.76 lacs

So, factoring services should not be availed.