Capital Investment Measures with Constraints: The Los Alamos Atoms have the option to purchase a contract of the leading national quarterback at a price of $4 million. The contract is good for five years. If the Atoms purchase the contract, they estimate that revenues from television franchises and from ticket sales will increase by the amounts shown in column 1 of Exhibit 16-41A. Franchise and other fees will increase by 10 percent of the amount of the increases in gross revenues. (These are cash outflows.)

The Atoms also have an opportunity to purchase a contract for a world-class wide receiver. This contract also runs for five years and costs $2.5 million. The expected revenue increase for this person are shown in the second column of Exhibit 16-41A.

Finally, for $1 million the Atoms can pick up the rights to the "Rookie of the Year under a five-year contract. The expected cash flows are shown in column 3 of Exhibit 16-41A.

Although the Atoms would like to take all three, their budget is limited to $4 million. The Atom's cost of capital is 10 percent. Ignore taxes.

Required:

a. Determine the NPV index for each player.

b. To maximize net present value, how should the Atoms allocate their resources among the available contracts?

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Exhibit 16-41A Revenue Increase (1) (2) (3) Quarterback Receiver Rookie Year 1 $1,500,000 $1,000,000 $ 0 Year 2 1,500,000 1,000,000 100,000 Year 3 Year 4 1,500,000 1,000,000 1,000,000 100,000 600.000 300,000 Year 5 800.000 300,000 1,500,000