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Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided in the image.                         Required: a) Identify which option of equipment should the company accept based on Profitability Index?  b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?

Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided in the image.                         Required: a) Identify which option of equipment should the company accept based on Profitability Index?  b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided in the image.                        

Required:

a) Identify which option of equipment should the company accept based on Profitability Index? 

b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years? 

 

Equipment 2 $195,000 Equipment 1 Cost $186,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 86 000 93 000 83 000 75 000 55 000 97 000 84 000 86 000 75 000 |63 000
Transcribed Image Text:Equipment 2 $195,000 Equipment 1 Cost $186,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 86 000 93 000 83 000 75 000 55 000 97 000 84 000 86 000 75 000 |63 000
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