Flexibility In Structuring of Rentals

Lease rentals can be structured to accommodate the cash flow situation of the lessee, making the payment of rentals, convenient to him, lease rentals are so tailor made that the lessee  is able  to pay the rentals from the  funds generated from operations, the lease period is also chosen so as to suit the lease capacity to pay rentals and considering the operating life span of the asset. Some of the ways to structure lease rentals are illustrated  below.

The following data relate to the Hypothetical leasing  Ltd:

(1) Investment outlay cost, Rs 100 lakh)

(2) Pre-tax required rate of return, 20 percent per annum

(3) Primary lease period, 5 years ,

(4) Residual value (after primary period) Nil

(5) Assumptions regarding alternative rental structures:

(A) Equated/Level
(B) Stepped (15 per cent increase per annum),
(C) Ballooned (annual rental of Rs 10 lakh for years 1-4)
(D) Deferred (deferment period of 2 years) .

The annual lease rentals under the above four alternatives are computed below:

1

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