Project Selection question

Submitted by Samir on Sun, 03/25/2012 - 19:13






















2. 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?
 

  a. Both projects are equally attractive.
  b The first project is more attractive by app. 7%.
  c. The second project is more attractive by app. 5%.
  d.

The first project is more attractive by app. 3%.


Can somebody please help me with this questions. The correct answer is 'd' but do not know how.


 

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twenty20

Mon, 03/26/2012 - 09:05

The formula used here is PV = FV/(1+rate)^n


You can find the detailed explanation for the answer in the below links


http://pmzilla.com/net-present-values-questions-pmp


http://pmzilla.com/need-help-one-question


Cheers, Naveen

Samir

Mon, 03/26/2012 - 09:35

thanks for the help.