a new specialized delivery truck needs to be purchased

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Mia Carriers has determined that a new specialized delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R480 000, calculated using the company’s WACC of 20%. The truck can be leased from the manufacturer. The lease agreement requires 5 annual payments of R800 000, with the first payment due on the delivery of the vehicle. The truck can also be purchased at a cost of R4 million, inclusive of a 4-year maintenance contract with the manufacturer. The R4 million will be paid upon delivery as the company has enough reserves to cover the cost of a truck in cash. The truck can be depreciated at 25% per annum using the reducing balance method and will be sold at book value at the end of 4 years. Assume a current corporate tax rate of 30% and a pre-tax cost of debt of 20%.

Required:
1.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative.
1.2 Briefly indicate which alternative should be recommended.

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