Subject : Finance for Business - Holmes College, Brisbane, Australia

Question 5 (7 marks)

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 86 000 97 000

Year 2 93 000 84 000

Year 3 83 000 86 000

Year 4 75 000 75 000

Year 5 55 000 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)