Question 5

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 companys 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:

1. Identify which option of equipment should the company accept based on Profitability Index?
2. Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?