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VW Limited, a South African - based chocolate manufacturing company, intends to expand its output capacity in order to meet the expected increase in demand

VW Limited, a South African-based chocolate manufacturing company, intends to expand its output capacity in order to
meet the expected increase in demand from the industry. The company plan is to acquire a new machine from China. They
have the option to either lease or purchase the new machinery. The machinery has a cost of R1850000.
LEASE:
The company can lease the machinery under a three-year lease. They have to make a payment of R600000 at the end of
each year. VW Limited has the option to buy the machinery at the end of the lease for R185000 and the financial manager
intends on exercising this option. Insurance costs of R14000 are borne by the lessee.
BUY:
Alternatively, the company could finance the R1850000 cost of the machinery through its retained earnings, payable
upfront. VW Limited will also pay an additional R52000 per year for insurance costs while the current running costs (water
and electricity) for similar machines are R55000 per annum.
Insurance is expected to increase by 6% per annum starting from year two. Due to improvements in the water supply and
the use of renewable means of energy in the factory, running costs are expected to decrease at a rate of 11% per annum
starting from year two.
Depreciation is calculated using the straight-line method.
Assume that the current corporate tax rate is 30% and the after-tax cost of debt is 11%.
Required:
You are required to:
4.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative.
(23

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