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 $186,000 $195,000 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 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 $186,000 $195,000 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 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?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 2P
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Question
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
projects are provided below.
Equipment 1 Equipment 2
Cost $186,000 $195,000
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
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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