Oliver 75 - 2nd Question
2. 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?
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%.
Lets discuss this question, please share reason behind your selection.