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Problem Solution

Bowling Inc. is planning to buy machine A which will cost SAR 10 million. The expected life of the machine is 5 years. The salvage value of the machine is nil. Jameel and Company Inc. is expecting a cash flow of SAR 5 million for the first two years, SAR 3 million for the next 2 years, and SAR 2 million in the 5th year. The operating expense is SAR 1 million every year. Present value of future cash inflow SAR 10.4315. (Assumption: No tax). Answer the following questions:

  1. Calculate NPV and based on the calculated value of NAV explain the project should be accepted or rejected?

Calculate Profitability Index (PI) and explain whether the project should be accepted or rejected?

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