Harding Gas Processors Limited (HGPL) which has a divisionalized 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).

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North Project Net cash Present Net cash East Project Present Net cash South Project Present Inflow/ Value @ Inflow/ Value @ Inflow/ Value @ Outflow 12% Outflow 12% Outflow 12% $'000 $'000 $'000 $'000 $'000 $'000 Yo (24,000) (24,000) (24,000) (24,000) (24,000) (24,000) Y 6,000 5,357.1 11,500 10,267.9 12,000 10,714.3 Y 8,000 6,377.6 11,500 9,167.7 10,000 7,971.9 13,500 9,609.0 11,500 8,185.5 9,000 6,406.0 Y 10,500 6,672.9 3,000 1,906.6 $4,016.7 $3,621.1 $2,998.8