Questions 5 A machine purchased for $1,000,000 with a life of 10 years, generates annual revenues of $300,000 and operat

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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%.
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)