Rock On is a global company. They have the option of either purchasing its own machinery or lease it.

The purchase option:

The plant will be purchased directly from Paris interiors at a cost of R130 000.The annual service costs will amount to R7 000 per annum for the firsttwoyears and R9 000 per annum for the remaining three years. Software licensing costs will amount to R6 000 per annum for thefirst two years and it is envisaged that this amount will increase by 5% each year thereafter.The plant,due to its high usage,will be sold as scrap at the end of the 5-year term at 10% of the purchase price.

Consider depreciation on straight line basis.

The lease option

A deposit of 40% of the purchase price is payable immediately. 50% of this amount will be refunded at the end of the lease period.The lessor will require an annual lease payment of R400 000. The lease payment covers the cost of the service and maintenance.

Note:

The after tax cost of debt is 10%

Assume a tax rate of 28%

Required:

2.1. Calculate the interest and principal components of Rock On by compiling a loan amortization schedule.

2.2. Calculate the after-tax cash outflow for each year under the lease alternative.

2.3. Calculate the after-tax cash outflows for each year under the purchase alternative.

2.4. Determine the present value of the cash outflow associated withthe lease and purchase alternatives.

2.5.Chose the best alternative and justify your answer