Fastway Transporters has determined that a new specialised delivery van needs to be purchased. The company has an option to either lease the asset or to purchase the asset. The details of each option are mentioned below:

Mr Lee got a quote from the manufacturing company for leasing out the delivery van. The lease agreement requires 5 annual payments of R600 000 with the first payment due on the delivery of the van. Alternatively, Mr Lee can purchase the van from the same supplier at a cost of three million Rands. Mr Lee would have to incur an additional amount of R20 000 per month for service chargers. Mr Lee would utilize his business savings to finance this option. The vehicle can be depreciated straight-line over the four years and will have a zero-market value at the end of its useful life. Required: Assume that the current corporate tax rate is 30% and the after-tax cost of debt is 14%.

You are required to:

3.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative. (23 marks) Show all calculations.

3.2 Briefly indicate which alternative should be recommended. (2 marks)