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QUESTION 3 REQUIRED: Study the information provided below and answer the following questions 3.1 Determine the after tax cash outflows and the net present value
QUESTION 3 REQUIRED: Study the information provided below and answer the following questions 3.1 Determine the after tax cash outflows and the net present value of the cash outflows under each alternative i.e. lease or purchase. (Round off amounts to the nearest rand) (18 marks) 3.2 Which alternative would you recommend? Why. (2 marks) INFORMATION: Makro Ltd needs to acquire a new delivery truck costing R320 000. The truck can be purchased or leased over a 5 year period. The after tax cost of debt is 7% and the company pays tax at 30%. The details of lease and purchase are as follows: LEASE The lease agreement would require annual end of year instalments of R110 000 over the five years. Makro Ltd will exercise its option to purchase the vehicle for R40 000 at the end of the lease. PURCHASE The cost of the delivery vehicle can be financed with a five year loan with an interest rate of 10% requiring annual payments of R84 415. Maintenance costs of R12 000 will be paid every year. The straight line method of depreciation is used. The interest payments for the respective 5 years are as follows: Year 1 2 3 R 32 000 26 759 20 993 14651 7 674 3 4 5
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