Bunnings Ltd is considering to invest in one of the two following projects to buy 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 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 the discounted payback method if the payback criterion is maximum 2 years?
Bunnings Ltd is considering to invest in one of the two following projects to buy new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required
Equipment 1 Equipment 2
Cost $186,000 $195,000
Future Cash Flows
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 the discounted payback method if the payback criterion is maximum 2 years?
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