Question on Project Justification

Hi Edward,

I need your help:) Can you help me to understand the following question and why answer is 3%:

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?

1. Both projects are equally attractive.
2. The first project is more attractive by app. 7%.
3. The second project is more attractive by app. 5%.
4. The first project is more attractive by app. 3%.

Thanks you and wish you all the best!