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?
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 3CMA
Related questions
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
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?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning