Need help on Project Selection Q

Submitted by peeyushm on Thu, 01/24/2013 - 12:08

 Please explain it.

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.

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.

 

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%

 

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admin

Fri, 01/25/2013 - 04:49

can you take the first shot at it. , What is your doubt ?

Josupra

Fri, 01/25/2013 - 05:03

 Present value = future value / (1+r)^n

we have the future values for both the projects in the question and r is .05

for the first project n is 1. Ad fr the second one you have t calculate PV for 3 years and add them. Now compare both first and second project. I think the answer would be option 3.

hope this helps

PS. Sorry I am on my mobile and don't have any calculator or pen and paper to do the math.

sspawar

Fri, 01/25/2013 - 06:25

I think this question is from OLIVER LEHHMAN , it has been solved many times earlier on this forum. please serch putting key words in search box.