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TOPIC: Question - Need to know how it is calculated

Question - Need to know how it is calculated 1 year 6 months ago #5692

  • Rachel
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Can you please let me know which is the right answer and how the calulations are done?

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%.
Last Edit: 1 year 6 months ago by Cornelius Fichtner.

Question - Need to know how it is calculated 1 year 6 months ago #5693

  • Sathish Kumar
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Ans : D
PV=FV/(1+R)^N R=Rate of interest, N = number of years

Project 1
Yr1 $ 120,000/(1+0.05)^1 = $ 114,286
Yr2 $ 120,000/(1+0.05)^2 = $ 108,844
Yr2 $ 120,000/(1+0.05)^3 = $ 103,661
Total $ 326,791

Project 2
Yr1 $ 15,000/(1+0.05)^1 = $ 14,286
Yr2 $ 125,000/(1+0.05)^2 = $ 113,379
Yr2 $ 220,000/(1+0.05)^3 = $ 190,044
Total $ 317,709

compare PV of both projects = (326791-317709)/326791*100 = 3%

Question - Need to know how it is calculated 1 year 6 months ago #5694

  • Cornelius Fichtner
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Rachel,

Please tell us where this question comes from. We want to make sure that the original question creator receives appropriate accreditation.

Thank you!
Until Next Time,
Cornelius Fichtner, PMP, CSM
President, OSP International LLC

Question - Need to know how it is calculated 1 year 6 months ago #5701

  • Rachel
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It came from oliver Lehman practice exam.

Question - Need to know how it is calculated 1 year 6 months ago #5704

  • Steve Sandoval
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Sathish's approach looks correct to me -- I would go with D also.
Steve Sandoval, PMP
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