(25) QUESTION 3 Marry's Steam Laundry needs to install a new automated plant in order to overall its plant modernisation and cost reduction programme. The plant can be leased or purchased. The company's pre-tax cost of capital is 10% and the income tax rate is 30%. Lease: The plant could be leased for R32 600 upon delivery and installation, plus four additional payments of R32 600 to be made at the end of years 1 to 4. The lessor is responsible for all servicing and maintenance cost amounting to R6 000 per annum. The plant has an expected life of six years. However, Marry plans to build an entirely news plant in four years and has no interest in either leasing or owning the proposed plant for more than the stated period. Owning The plant has an invoice price of R100 000, including delivery and installation charges of R20 000. A cash payment is made in full upon installation. Service fees of R9 000 will be paid at the end of each of the 4 years. Depreciation is calculated at 25% per annum, using the reducing balance method. Marry intends to sell the plant at the end of year 4, at its book value. Required: 3.1 Calculate the after-tax cash outflows and the net present value of the cash outflows under each alternative. (22) 3.2 Which alternative would you recommend? Why? (3) (25) QUESTION 4 The directors of Westwood Limited have appointed you as their financial consultant. They are considering new investment projects and need you to calculate the cost of capital for the company. The present capital structure is as follows:- 3 450 000 ordinary shares with a par value of 75 cents per share. These shares are currently trading at R4.50 per share and the latest dividend paid is 30 cents. An average dividend growth of 13% is maintained. 500 000 14% R3.00 preference shares, with a market value of R5.00 per share. RS 000 000 non-distributable reserves R5 200 000 8% debentures due in 6 years' time and the current yield-to-maturity is 6%, and R750 000 13% bank loan. Additional information: The company has a beta of 1.7, a risk-free rate of 5% and enjoys a premium of 8%. . The company's tax rate is 30%