Bunnings Ltd is considering to investin 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 86 000 97 000 Year 2 93 000 84 000 Year 3 83 000 86 000 Year 4 75 000 75 000 Year 5 55 000 63 000 identify which option of equipment should the company accept based on discounted pay back method if the payback criterionis maximum 2 years?
Bunnings Ltd is considering to investin 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
Equipment 1 Equipment 2
Cost $186,000 $195,000
Future Cash Flows
Year 1 86 000 97 000
Year 2 93 000 84 000
Year 3 83 000 86 000
Year 4 75 000 75 000
Year 5 55 000 63 000
identify which option of equipment should the company accept based on discounted pay back method if the payback criterionis maximum 2 years?
Discounted Payback Period is one of the capital budgeting techniques. This technique of capital budgeting considers the time value of money. Under this method, all the cash flows of the project are discounted to find their present values and then the present value of cash inflows is compared with the present value of cash outflows, in order to find the time period which is required to cover up the initial cost of the project. It is given by the formula,
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