Question $4$

$[25$ Marks$]$

Volvit Carriers has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R$480000,$ calculated using the company's WACC of $20\%.$ The truck can be leased from the manufacturer. The lease agreement requires $5$ annual payments of R$360000,$ with the first payment due on the delivery of the vehicle. The truck can also be purchased at a cost of R$2$ million, inclusive of a $4$ year maintenance contract with the manufacturer. The R$2$ million can be borrowed at an after tax rate of $12\%$ per annum. The loan would be secured against the truck and would be amortised over the useful economic life of the vehicle.

The loan payments for each of the first three years are R$732567$ payable at the end of each year. The loan payment for year $4$ amounts to R$725637.$ The vehicle can be depreciated straight$-$line over the same period and will have a zero market value at the end of $4$ years. Interest payments included in the year end loan payments for the respective four years are R$343000$; R$276189$; R$197920$ and R$106229.$

Assume a current corporate tax rate of $30\%.$ Round off final answers to the nearest whole number.

Required:

$4\mathrm{.}1.$ Determine the after$-$tax cash flows and the net present value of the cash outflows under

$(22$ marks$)$

each alternative.

$4\mathrm{.}2.$ Briefly motivate which alternative should be recommended.

$(3$ marks$)$