Dre has been quietly growing a software business that serves the sports and entertainment sector. He has an opportunity to pursue two new projects. These projects promise to increase his business cash flows, which have recently stabilized. Project A will cost $75,000 up-front in equipment investments, with ongoing maintenance costs of $750; the incremental impact to annual net income will be +25% for a period of 3 years (no compounding). Project B will cost $80,000 up-front in equipment investments, with ongoing maintenance costs of $500; the incremental impact to annual net income will be +22% for 2 years (no compounding).

Selected 2019 Financials:

Assets (exclusive of project investment): $200,000

Revenue: $500,000 software sales + $125,000 service contracts

Expenses: $80,000 salary + $20,000 office rent

If the discount rate is 9%, which project should he choose? Why?

What is his annualized ROA for each project option?