Oliver LEHMANN, question 2 (about Present Value)
I have been struggling for a while now with an exercise which requires the PV=FV/(1+r)^n formula.
Right answer is supposed to be D but I cannot figured out where comes from the 3%... I would greatly appreciate that someone show me step by step how to solve this exercise which has been torturing me for 2 days now
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%.