Question 1

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Question
1



(7 marks)
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: