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TOPIC: present values

present values 3 months 5 days ago #8167

  • Twana Amin
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Hi,
Below question is from Oliver Lehmann,
Kindly I need support how to calculate it.

A company has to make a choice between two projects, because the available resources in money and kind are not suffihow cient 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%


BR//
Twana
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