Present value exceeds the projected net present value

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Reference no: EM131205337

Ginger Company recently installed a postaudit program. To motivate their employees to take the program seriously, Ginger established a bonus program. Managers receive a bonus equal to 10 percent of the amount by which net present value exceeds the projected net present value. Jim Hey, manager of the Mid West Division, had an investment proposal on his desk when the new system was implemented. The investment opportunity required a $250,000 initial cash outflow and was expected to return cash inflows of $90,000 per year for the next five years. Ginger's desired rate of return is 10 percent. Mr. Hey immediately reduced the estimated cash inflows to $70,000 per year and recommended accepting the project. Discuss the long-term effect the bonus plan is likely to have on the company.

Reference no: EM131205337

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