Financial Evaluation Homework Help

Financial Evaluation

The framework of financial evaluation of a hire purchase deal vis-a-vis a finance lease, discussed below, covers both the hire as well the finance company's viewpoint.

From the Point of View of the Hirer (Hire Purchaser)

The tax treatment given to hire purchase is exactly the opposite of that given to lease financing. It may be recalled that in leasing financing, the lessor is entitled to claim depreciation and other deductions associated with the ownership of the equipment, including interest on the amount borrowed to purchase the asset, while the lessee enjoys full deduction of lease rentals. In sharp contrast, in a hire purchase deal, the hirer is entitled to claim depreciation and the deduction for the finance charge (interest) component of the hire instalment. Thus, hire purchase and lease financing represent alternative modes of acquisition of assets. The evaluation of hire purchase transaction from the hirers angle, therefore, has to be done in relation to the leasing alternative.

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