Question on NPV

Submitted by pradipchavan82 on Tue, 03/26/2013 - 20:00

 Can someone please explain me the answer for this question? Answer is 4 but I am unable to understand how it comes to 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.
  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%.

 

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AP

Tue, 03/26/2013 - 20:07

Please do a search before posting questions which will help you get the answer immediately. The same question has already been discussed in this forum. Please refer the below url.

 

http://pmzilla.com/oliver-lehmann-question-2-about-present-value