QUESTION THREE [20] Surprise Manufacturers are a global company with head offices in Cape Town, South Africa. They feel with business class travel costs on the rise, they are considering their options in this respect and have decided to acquire a company jet for their travel purposes. This may result in an outright purchase or a lease. The Purchase Option 1. The jet will be purchased from Airbus and will cost 15 000 000 French francs. 2. The annual service costs will amount to R80 000 per annum for the first 2 years and R90 000 for the remaining three years. 3. Licensing costs will amount to R10 000 per annum for the first year and increase by 6% per annum thereafter. 4. The jet will be sold to Pineapple Airlines at the end of the 5 year term for 60% of the purchase price, which is considered fair value. Consider depreciation on straight line. The Lease Option If the jet is leased, the following will apply: 1. A deposit of 40% of the purchase price is payable immediately. 30% of this deposit amount will be refunded at the end of the lease term. It is assumed that the amount will be received in full. 2. The lessor will require an annual lease payment of R 3 000 000. The lease payment covers the cost of service and maintenance. 3. At the end of the 5 year period, the jet will revert to the owner, Airbus. Note: a. The after tax cost of debt is 10% b. The tax rate is 30% c. The exchange rate is 1 Franc = R1.10 ZAR (South African Rand). d. All answers must be expressed in ZAR. (14) Required: 3.1. Determine the present value of cash flows associated with each alternative. 3.2. Explain which option you will recommend to Surprise Manufacturers. 3.3. Distinguish between a leveraged lease and a sale and a leaseback. (2)