Can someone explain the logic to this question... Thanks in advance

Submitted by ragoy82@gmail.com on Sat, 03/30/2013 - 12:55

From a practise question and ans has been highlighted in blue..

 

Can some one please explain this logic

 

  A company has to make a choice between two projects, because the available resources in money and kind are not sufficient to run both at the same time. Each project would take 9 months and would cost $250,000.
  1. The first project is a process optimization which would result in a cost reduction of $120,000 per year. This benefit would be achieved immediately after the end of the project.
     
  2. The second project would be the development of a new product which could produce the following net profits after the end of the project:

1. year:       $ 15,000
2. year: $ 125,000
3. year: $ 220,000

Assumed is a discount rate of 5% per year. Looking at the present values of the benefits of these projects in the first 3 years, what is true?
 
  Both projects are equally attractive.
  The first project is more attractive by app. 7%.
  The second project is more attractive by app. 5%.
  The first project is more attractive by app. 3%.

 

Forums: 
General Discussion
  • Log in to post comments
  • 329 reads