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 below. Equipment 1 Equipment 2 Cost $186000 $195000 Future Cash Flow Year 1 86000 97000 Year 2 93000 84000 Year 3 83000 86000 Year 4 75000 75000 Year 5 55000 63000 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 below. Equipment 1 Equipment 2 Cost $186000 $195000 Future Cash Flow Year 1 86000 97000 Year 2 93000 84000 Year 3 83000 86000 Year 4 75000 75000 Year 5 55000 63000 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
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
Problem 1PS
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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
| Equipment 1 | Equipment 2 | |
| Cost | $186000 | $195000 |
| Future Cash Flow | ||
| Year 1 | 86000 | 97000 |
| Year 2 | 93000 | 84000 |
| Year 3 | 83000 | 86000 |
| Year 4 | 75000 | 75000 |
| Year 5 | 55000 | 63000 |
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?
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