Harding Gas Processors Limited (HGPL) which has a divisionalised structure, undertakes civil engineering and mining activities. Under the terms of the management incentive plan, which is currently in operation, the managers of each division are eligible to receive annual bonus payments which are calculated by reference to the return on investment (ROI) earned during each of the first two years by the new investments. ROI is calculated using the opening book value of the asset (i.e. cost of asset less the accumulated depreciation at the start of the year). One of the most profitable divisions during recent years has been the IOA Division, which is engaged in the processing of gas. The management of IOA Division is currently evaluating three projects relating to the further extraction of petrochemical Y from different areas around the country. The management of IOA Division has been given approval by the board of directors of HGPL to spend $24 million on anyone of the three proposals it is considering (i.e. North, East and South projects).

North Project Net cash Inow/ Outow $000 (24,000) 6,000 8,000 13,500 10,500 Present Value @ 12% $000 (24,000) 5,357.1 6,377.6 9,609.0 6,672.9 $4,016.7 East Project Net cash Present Inow/ Value @ Outow 12% $ '000 $ '000 (24,000) (24, 000) 11,500 10,2679 11,500 9,167.7 11,500 8,185.5 $3,621.1 South Project Net cash Inow/ Outow $000 (24,000) 12,000 10,000 9,000 3,000 Present Value @ 12% $000 (24,000) 10,7143 7,971.9 6,406.0 1,906.6 $2,998.23