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Questions 5

A machine purchased for $1,000,000 with a life of 10 years, generates annual revenues of $300,000 and operating expenses of $100,000. Assume that machine will be depreciated over 10 years using straight-line depreciation with zero balance at the end of the life. The corporate tax rate is 30%.

1. Calculate annual net cash flow of the project
2. Calculate project NPV.

Guide:

Annual net cash flow: (Revenue operating cost depreciation Tax + Deprecation)

Profit before tax = Revenue operating cost depreciation

Profit after tax = Profit before tax tax amount

Amount of tax to be paid= profit before tax * tax rate

Depreciation per year = Machine cost / number of year of project

	0	1	2	3	4	5	-------10
Purchase cost (initial outlay: IO)
Revenue							\
Operating expenses							\
Depreciation							\
Profit before tax							\
Tax							\
Profit after tax							\
Add depreciation							\
Annual net cash flow							\
PV of cash flow (10%)							\
NPV

Part B

Describe and discuss concept of Diversification. Why the diversification is important for risk management? (1 page)

Describe and discuss about the Saudi Stock Exchange in terms of investors participation, liquidity of the markets and investment opportunity (at least a page)

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