Bunnings 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

Required:

a) Identify which option of equipment should the company accept based on Profitability Index? (4 marks)

b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years? (3 marks)