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Identify which option of equipment should the company accept

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Question - 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 Cost $186,000 Future Cash Flows year 1- 86 000 year 2 - 93 000 year 3 - 83 000 year 4 - 75 000 year 5 - 55 000

Equipment 2 cost $195,000

Future Cash Flows Year 1 - 97 000 year 2 - 84 000 year 3 - 86 000 year 4 - 75 000 year 5- 63 000

Required -

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

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

Reference no: EM132700737

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