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? (

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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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