Meridian Foods: Own the Fleet or Rent It?
Meridian Foods operates in packaged foods across India. It needs additional equipment for the next 6 years and has two offers on the table.
Buy: ₹27 Cr up front, depreciated straight-line over 6 years, with an expected resale value of about 20% of cost at the end.
Lease: ₹6.2 Cr per year for 6 years, fully deductible, with the lessor carrying maintenance and taking the asset back at the end.
The company's discount rate is 11.4% and its effective tax rate is 24%. Current utilisation of the existing equivalent fleet runs at 63%, and the operations director expects demand in this segment to be lumpy.
buy option
- purchase price cr
- 27
- residual value cr
- 5.4
- depreciation years
- 6
- residual value pct
- 20
assumptions
- discount rate pct
- 11.4
- effective tax rate pct
- 24
- current fleet utilisation pct
- 63
lease option
- term years
- 6
- annual payment cr
- 6.2
- 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.