Question 2:Bunnings Ltd is considering to invest in one of the two following projectsto 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 FlowsYear 1Year 2Year 3Year 4Year 5 Year 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 discountedpay back method if the payback criteria is maximum 2 years?
Question 2:Bunnings Ltd is considering to invest in one of the two following projectsto 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 FlowsYear 1Year 2Year 3Year 4Year 5 Year 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 discountedpay back method if the payback criteria is maximum 2 years?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 22E
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Question 2:Bunnings Ltd is considering to invest in one of the two following projectsto 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 FlowsYear 1Year 2Year 3Year 4Year 5 Year |
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 discountedpay back method if the payback criteria is maximum 2 years?
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