Cheetah Wheel & Alignment is considering the purchase or lease of a new state of the art wheel alignment machine for their premises in Brickfield Road, Overport, KwaZulu Natal. The business has 2 options to facilitate the purchase ie buy it straight out or lease it. Below are the details for the 2 options:

The Purchase Option

The cost is R 60 000. This amount will be paid in cash. It is estimated that this machine will only have a lifespan of 5 years and will then be sold back to the seller at a residual value of R10 000. Depreciation is calculated on a straight-line basis. There is an annual software update and it will cost, R10 000 p.a.

Maintenance Costs are as follows:

• Years 1 and 2: R6 000 per year
• Year 3: R5 500
• Years 4 and 5: R5 000 per year

The Leasing Option

An initial deposit of 25% of the purchase price is required and the lease will run for 5 years. Annual payments of R15 000 need to be made at the end of each of the 5 years. On expiry of the 5th year, 20% of the deposit will be refunded. No other costs will be borne by Cheetah Wheel & Alignment.

Note:

• Their after tax cost of cost of capital is 10 %
• Their tax rate is 30%.

Required:

Determine the present value of cash flows associated with each alternative. Which option will you recommend to Cheetah Wheel & Alignment?