Reference no: EM133205683

Zayn Transporters has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R780 000, calculated using the company's WACC of 19%. The truck can be leased from the manufacturer. The lease agreement requires 5 annual end of year payments of R280 500 with annual maintenance cost amounting to R40 000. Alternatively, the truck can be purchased at a cost of R1.25 million, inclusive of a 5-year maintenance contract with the manufacturer. The truck can be depreciated straight-line over the same period and will have a zero-market value at the end of 5 years. Insurance costs are expected to be R2 000 per month over the 5 years. You may assume that the current corporate tax rate is 28% and the after-tax cost of debt is 13%.

1. Determine the after-tax cash flows and the net present value of the cash outflows under each alternative.

2. Briefly indicate which alternative should be recommended.