Case Study

A private company is considering investing in new IT machinery. Currently, the transportation has been contracted to an outside organization.

The initial cost of the transport fleet would be AED 6,000,000 and also require AED 500,000 investment in working capital. The life of the transport fleet would be 6 years, after which time the IT Machinery would have to be scrapped with no salvage value, at the end of 6 years, using the Double Declining Balance method.

The management has come up with the following Revenues and Cost data for the next 6 years. Sales to its customers will amount to AED 750,000 for the next three years and then increase to AED 1,500,000 for the last three years.

To raise funds for the project your company is proposing to raise a long-term loan at 11% interest rate per annum.

2. Calculate the following for the IT Machinery project:

(i) Payback period

(ii) Accounting rate of return

(iii) Net present value