You are in charge of Atlas Corporation\'s research and development division, and

Question

You are in charge of Atlas Corporation's research and development division, and must make a recommendation to the Board of Directors as to which of three projects currently planned should be implemented. The President of Atlas has forewarned you that the Board of Directors requires a rate of return of at least 10% and that since money is scarce, only one project will be accepted. Which project will you recommend assuming the following costs and returns are known to be certain? (Use Present Value calculations.)

Date May 31,2016 May 31,2017 May 31,2018 May 31,2019 May 31,2020 May 31,2021 May 31,2022 May 31,2023 Project 1 $(50,000) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 Project 2 S(50,000) Project 3 S(50,000) 20,000 30,000 30,000 30,000 40,000 160,000

Explanation / Answer

NPV of Project 1 = -50000 + 20000(4.868....)

= $47368.38

NPV of Project 2 = -50000 + 20000(0.751....) + 30000(1.868....) + 40000(0.385....)

= -50000 + 15206.30 + 56052.26 + 15421.73

= $36680.29

NPV of Porject 3 = -50000 + 160000(0.385....)

= -50000 + 61686.93

= $11686.93

NPV of project 1 is highest. Hence it should be selected.

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