Reference no: EM131575611

Solo Carriers has determined that a new specialised delivery truck needs to be purchased. Alternatively the truck can be leased from the manufacturer. The lease agreement requires 5 annual payments of R360 00, with the first payment due on the delivery of the vehicle. The truck can also be purchased at a cost of R2 million, inclusive of a 4 year maintenance contract with the manufacturer. The r2 million can be borrowed at an after tax rate of 12% per annum. The loan would be secured against the truck and would be amortised over the useful economic life of the vehicle. The loan payments for each of the first three years are R732 567 payable at the end of each year. The loan payment for year 4 amount to R725 637. The vehicle can be depreciated straight-line over the same period and will have a zero market value at the end of 4 years. Interest payments for the respective four years are R343 000; R276 189; R197 920 and R106 229. Assume a current corporate tax rate of 30%. Required: 1. Calculate the after-tax rate cash flows and the net present value of the cash outflows under each alternative. 2. Briefly indicate which alternative should be recommended.