Bunnings Ltd is considering investing in one of the two following projects to buy new equipment. Each
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Question:
Bunnings Ltd is considering investing in one of the two following projects to buy new equipment. Each piece of 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 |
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 payback method if the payback criterion is a maximum of 2 years?
Expert Answer:
a PI Total PV of expected CFs Initial Cash OutlayInvestment Profitability index of e... View the full answer
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