Bunnings Ltd is considering to investin 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 $186,000 $195,000 Future Cash Flows Year 1 86 000 97 000 Year 2 93 000 84 000 Year 3 83 000 86 000 Year 4 75 000 75 000 Year 5 55 000 63 000 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 criterionis maximum 2 years?
Bunnings Ltd is considering to investin 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 $186,000 $195,000
Future Cash Flows
Year 1 86 000 97 000
Year 2 93 000 84 000
Year 3 83 000 86 000
Year 4 75 000 75 000
Year 5 55 000 63 000
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 criterionis maximum 2 years?
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