Saffron Retail: Own the Fleet or Rent It?
Saffron Retail operates in apparel retail across India. It needs additional equipment for the next 4 years and has two offers on the table.
Buy: ₹45 Cr up front, depreciated straight-line over 4 years, with an expected resale value of about 13% of cost at the end.
Lease: ₹13.6 Cr per year for 4 years, fully deductible, with the lessor carrying maintenance and taking the asset back at the end.
The company's discount rate is 12.5% and its effective tax rate is 27%. Current utilisation of the existing equivalent fleet runs at 55%, and the operations director expects demand in this segment to be lumpy.
buy option
- purchase price cr
- 45
- residual value cr
- 5.8
- depreciation years
- 4
- residual value pct
- 13
assumptions
- discount rate pct
- 12.5
- effective tax rate pct
- 27
- current fleet utilisation pct
- 55
lease option
- term years
- 4
- annual payment cr
- 13.6
- maintenance included
- true
Advise the CFO. Your answer should provide:
- Analysis — the present value of each option, on a comparable after-tax basis.
- Risks — utilisation, obsolescence, and what the balance sheet treatment changes.
- Recommendation — lease or buy, with the number, and the condition that would reverse it.
State any assumptions you make.
80 points, 60% to pass.
- recommendation20
- market analysis15
- risk assessment20
- financial analysis25
Reveal suggested structure
Discount both after-tax cash flow streams over the same horizon, include depreciation tax shield and residual on the buy side, then test against utilisation.