Conflict between performance evaluation and use of npv lo

Assignment Help Accounting Basics

Reference no: EM13602395

Conflict Between Performance Evaluation and Use of NPV [LO 7]Division managers at Creighton Aerospace are evaluated and rewarded based on ROI targets. In the current year, Delmar Richards, the president of the commercial products division, has an ROI target of 12 percent. If the division has an ROI of 12 percent or greater, Delmar will receive 250,000 options on Creighton stock in addition to a base salary of $400,000.

The commercial products division is considering a major investment in product development, which has a net present value of $25,000,000. However, the investment will have a negative effect on reported profit over the next two years, after which the investment will begin to have a significant positive effect on firm profitability for the next eight years.

a. Discuss the potential conflict between the company's evaluation/compensation system and Delamr's focus on the NPV of the investment in product development.

b. Suppose Delmar currently holds stock in Creighton Aerospace with a market value of $1,250,000 and has options on 500,000 shares (awarded in previous years). Is this likely to exacerbate or mitigate the conflict you discussed in part (a)?

Depreciation Tax Shield [LO 4]

Strauss Corporation is making a $70,000 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company's required rate of return is 11 percent.What is the present value of the tax savings related to depreciation of the equipment?

Reference no: EM13602395

Questions Cloud

The chute is deployed is -00003v2 speed v in feet per : the 230000-lb space-shuttle orbiter touches down at about 220 mihr. at 200 mihr its drag parachute deploys. at 35 mihr

On march 31 2010 willey market issued 150000 worth of : on march 31 2010 willey market issued 150000 worth of 10-year eight percent bonds when the market rate was nine

Multi-step and single step income statement and statement : multi-step and single step income statement and statement of comprehensive income on december 312010 the adandt

Which of the following performance measures is considered : which of the following performance measures is considered the most sophisticated and is felt to give top management the

Conflict between performance evaluation and use of npv lo : conflict between performance evaluation and use of npv lo 7division managers at creighton aerospace are evaluated and

For each reaction that you indicated as negative recommend : wright company employs a computer based data processing system for maintaining all company records. the current system

A process used by a company to help identify the risks : a process used by a company to help identify the risks that it faces and to develop responses to those risks that

The wood division of fir products inc manufactures wood : the wood division of fir products inc. manufactures wood moldings and sells them externally for 100. its variable cost

Messier inc manufactures cycling equipment recently the : messier inc. manufactures cycling equipment. recently the vice president of operations of the company has requested

User Account

All Pages