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QUESTION 2 Joey Transport has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present
QUESTION 2 Joey Transport has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R750 000, calculated using the company's WACC of 20%. The truck can be leased from the manufacturer. The lease agreement requires: - 5 annual payments of R612 000, with the first payment due on the delivery of the vehicle. -Service costs amount to R19 000 p.a -The lessee will exercise its option to purchase the truck at the end of the leasing period for R21 000. The truck can also be purchased at: - a cost of R1 800 000, inclusive of a 4-year maintenance contract with the manufacturer. -The R1 800 000 can be borrowed at an after-tax rate of 11% per annum. - However, Joey Transport decides to rather purchase the truck in cash. -The vehicle can be depreciated using the straight-line method over the same period. -The truck will be sold at its scrap value of R40 000 at the end of the period. Assume a current corporate tax rate of 30%. 2.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative. 2.2 Briefly indicate which alternative should be recommended.
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