Question: NEW PROJECT ANALYSIS UAE Manufacturing is considering the purchase of a new production machine for SAR 600,000.

Question:NEW PROJECT ANALYSIS                                                             

UAE Manufacturing is considering the purchase of a new production machine for SAR 600,000. The purchase of this machine will result in an increase in earnings before interest and taxes of SAR 175,000 per year. To operate this machine properly, workers would have to go through a brief training session that would cost SAR 30,000 after taxes. It would cost SAR 10,000 to install the machine properly. Also, because the machine is extremely efficient, its purchase would necessitate an increase in inventory or SAR 40,000. This machine has an expected life of 10 years; after which it will have no salvage value. Assume simplified straight-line depreciation and that this machine is being depreciated down to zero, a 27 percent marginal tax rate, and a required rate of return of 12 percent. 


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Change in EBIT  = 141,000

Purchase Price  = 483,000

Training Session Fee= 17,000

Installation Fee = 14,500

Increase in Inventory = 15,000

Life = 10

Salvage Value = 0

Depreciation = 52,600

Tax Rate = 27%

Required rate of return = 12%


What is the initial outlay associated with this project?                                                    

Outflows   =                      

Purchase Price  =                                            

Training Session Fee =                                   

Installation Fee =           

Increased Working Inventory =                                 

  Net Initial Outlay =                                      

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