The Randolph Limited has decided to acquire a new truck. One alternative is to lease the truck on a 4-year guideline contract for a lease payment of R10,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. Alternatively, Randolph Limited could purchase the truck outright for R40,000, financing the purchase by a bank loan for the net purchase price and amortizing the loan over a 4-year period at an interest rate of 10% per year. Under the borrow-to-purchase arrangement, RTC would have to maintain the truck at a cost of R1,000 per year, payable at year end. The truck falls into the MACRS 3-year class. It has a residual value of R10,000, which is the expected market value after 4 years, when Randolph Ltd plans to replace the truck irrespective of whether it leases or buys. Randolph Limited has a marginal tax rate of 40%.

Required

1.1 What is Randolphs Present Value cost of leasing? (10 marks)

1.2 What is Randolphs Present Value cost of owning? Should the truck be leased or purchased? (10 marks)