Exercise:

Riyadh Company is considering an investment proposal that requires an investment of $1,600,000$ SAR and has no salvage value at the end of its productive life, which is estimated to be eight years. The investment proposal yields an annual cash flow of $500,000$ SAR and an annual depreciation expense of $200,000$ SAR.

Required:

Determine the payback period and assume the company has set a maximum payback period of $3$ years. Does the investment proposal get accepted? Why or why not? $($Grade$)$

Determine the Net Present Value $($NPV$)$ and decide whether the proposal should be accepted. Why or why not? Note that the present value factor at a discount rate of $28\%$ for an annuity of one SAR for $8$ years is $2\mathrm{.}759.($Grade$)$

The solution is to be applied in Excel.