Question need explanation Please
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 these projects' revenues in the first 3 years, what is true?