Need help in one of the question
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%.
Ans : D
iragavni
Sun, 12/25/2011 - 04:31
Permalink
1st project NPV = 120/1.05 +
1st project NPV = 120/1.05 + 120/(1.05*1.05) + 120/(1.05*1.05*1.05) = 327
2nd project NPV = 15/1.05 + 125/(1.05*1.05) + 220/(1.05*1.05*1.05) = 317
1st project's NPV is approx 3% more than 2nd project.
Correct answer is D.