Giant Shipping Ltd is considering to invest in one of the two following projects to buy a new equipment for its new contracted project. 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 8.5%. The cash flows of the projects are provided below.
Equipment 1
Equipment 2
Cost
$256,000
$295,000
Future Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
96 000
123 000
183 000
175 000
155 000
98 000
184 000
186 000
195 000
163 000
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 simple pay back method if the payback criterion is maximum 2 years? (
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