Giant Shipping Ltd is considering to invest in one of the two following projects to buy a new equipment for its new contracted project. 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 8.5%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $256,000 $295,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 96 000 123 000 183 000 175 000 155 000 98 000 184 000 186 000 195 000 163 000 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 simple pay back method if the payback criterion is maximum 2 years? (
Giant Shipping Ltd is considering to invest in one of the two following projects to buy a new equipment for its new contracted project. 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 |
$256,000 |
$295,000 |
|
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 |
96 000 123 000 183 000 175 000 155 000 |
98 000 184 000 186 000 195 000 163 000 |
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 simple pay back method if the payback criterion is maximum 2 years? (
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