1) The Board decided to launch a new R&D program to catch up the competitors on the RedAnt technology.
The R&D team came back with two viable R&D projects with the following projected cash in-flows (All figures are in $'000s):
2020 2021 2022 2023 2024
Plan A 0 400 600 800 1,000
Plan B 0 350 550 750 950
Plan A will require an initial investment of $1 million in 2020, whereas Plan B will require an initial investment of $500,000 in 2020 and another investment of $500,000 in 2022 depending on the status of the project at that time. That is, SensorTech can fold the project at that time if the progress is not satisfactory.
a) Assuming that SensorTech can borrow money at 10%, calculate the NPV for each plan. Assume that the terminal value for both plans will be identical.
b) Which plan should you choose? Why? (5 points)