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Option of equipment

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Reference no: EM133069016

Big Bang 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

Equipment 2

Cost

$186,000

$195,000

Future Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

 

86 000

93 000

83 000

75 000

55 000

 

97 000

84 000

86 000

75 000

63 000

Big Bang's net income in current year is $450,000. The company maintains a capital structure of 55% in equity funding and 45% in debt funding.

Required:

1. Identify which option of equipment should the company accept based on NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)

2. Identify which option of equipment should the company accept based on Profitability Index method .

3. Which equipment option should the company finally choose if the company is facing soft capital rationing? 

4. How much dividend Big Bang Ltd can pay its shareholders given the chosen project you decided in question (c) and if the Residual Dividend Payout Policy applies? 

Reference no: EM133069016

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