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