QUESTION THREE $(25$ Marks$)$

Liverpool Limited urgently needs to upgrade its utility capacity. They require a new generator costing R$1200000.$ The

generator can be leased or owned and the terms are as follows:

Cost of leasing:

The lease would require annual end$-$of$-$year payments of R$320200$ over the four years.

Service and insurance costs of R$78500$ per annum will be borne by the lessor.

The lessee will exercise its option to purchase the asset for R$80000$ at the termination of the lease in four years.

Cost of owning:

The cost could will be settled in cash due to the companies excess cashflows after winning the Premier league in $2023.$

Liverpool Limited will pay maintenance cost of R$6000$ per month. Depreciation charges are based on the straight$-$line

method. At the end of the period the generator will be sold at its residual value of

R$75000.$

Additional Information:

$$ the company is in the $28\%$ tax bracket

$$ the after$-$tax cost of the debt is $13\%$

Required:

$3\mathrm{.}1$ Calculate the after$-$tax cash outflows and the net present value of the cash outflows under each

alternative. $(22)$

$3\mathrm{.}2$ Which alternative would you recommend? Why? $(3)$