A firm can invest in one of two projects: the purchase of new manufacturing equipment or the training of its factory workers in the better use of time management. Both projects cost the same amount of money. The purchase of new manufacturing equipment is expected to reduce costs by $10,000 each year for 5 years. The training of the factory workers in the better use of time management is expected to increase revenues by $10,000 each year for 10 years. Which of the following is true?

A) Each of these projects would have the same expected rate of return, as they both cost the same.
B) The purchase of new manufacturing equipment would have the higher expected rate of return, as it reduces costs whereas the training of factory workers in the better use of time management only increases revenues.
C) The training of factory workers would have the higher expected rate of return, as it will increase revenues for a longer time period than the purchase of new manufacturing equipment will reduce costs.
D) The expected rates of return for these two projects cannot be compared, as one project reduces costs and the other increases revenues.

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Xinen Huang · Accepted Answer

Final Answer : C, Explanation :  The training of factory workers has a higher expected rate of return because it increases revenues for 10 years, compared to the equipment's cost reduction which lasts for only 5 years, despite both having the same initial cost.

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