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 2Cost $186,000 $195,000Future Cash FlowsYear 1 86000 97000Year 2 93000 84000Year 3 83000 86000Year 4 75000 75000Year 5 55000 63000 Identify which option of equipment should the company accept based on the discounted payback method if the payback criterion is maximum 2 years?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 2P

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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

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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