QUESTION THREE $[20]$

Vital Laundromats is considering the purchase or lease of a new washing machine for their

Laundromat in Pinetown, KwaZulu $$Natal$.$

The Purchase Option

The cost is R$60000.$ This amount will be paid in cash. It is estimated that this machine, due to a

high level of attrition will only have a lifespan of $5$ years, and will then be sold back to the seller at a

residual value of R$5000.$ Depreciation is calculated on a straight line basis. There is an annual software update and it will cost, R$9000$ pa$.$

Maintenance Costs are as follows:

$$ Year $1$ and year $2$: R$2000$ per year

$$ Year $3$: R$3500$

$$ Year $4$ and $5$: R$5000$ per year

The Leasing Option

An initial deposit of $30\%$ of the purchase price is required and the lease will run for $5$ years. Annual

payments of R$12500$ need to be made at the end of each of the $5$ years. On expiry of the $5$th year, $20\%$ of the deposit will be refunded. No other costs will be borne by Paradise Laundromats.

Note:

$$ Their after tax cost of cost of capital is $10\%$

$$ Their tax rate is $30\%.$

Required:

Determine the Net present value of cash flows associated with each alternative. Which option will recommend to Paradise Laundromats?