Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION 2 Joey Transport has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present

image text in transcribed

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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations of Finance The Logic and Practice of Financial Management

Authors: Arthur J. Keown, John D. Martin, J. William Petty

8th edition

132994879, 978-0132994873

More Books

Students also viewed these Finance questions