1. Al Dar wants to invest in a new portable solar electricity product with a life of 8 years. Mr. Assif the project manager is tasked to perform an economic feasibility study about the project and submit a report. Mr. Assif collected the following data about the project to conduct the feasibility analysis:

• State Government in order to promote solar energy provides a tax-free subsidy for $2.5 million on initial capital investment.
• The equipment cost at the beginning of the project will be $17.5 million. The project also requires some additional equipment at the end of the third year for $1.25 million.
• The total life of the original equipment is 8 years with zero resale/ salvage value. Life of additional equipment is 5 years and a salvage value of $125,000.
• The working capital requirement at the initiation of the project is $2 million. The working capital will get fully realized in the ending year.
• Full financing for the project is done by issuing equity.
• The estimated sales volume over the 8 year period is:-

• Expected Sales price = $120 per unit.
• Variable expenses will amount to 60% of sales revenue.
• The fixed operating cost will amount to $1.8 million per year.
• The loss of any year will be set- off from the profits of the subsequent two years.
• AlDAR is subjected to a tax rate of 30%.
• AlDar follows the straight-line method of depreciation.

Mr. Assif calculates the net present value (NPV) of the project by discounting the cash-flows at 12%. If NPV is positive then the project is feasible and the company can consider the project to be taken.

Question 1: Find out the depreciation value by using the following equation:

Depreciation = Asset Cost Salvage Value / Useful Life of Asset