Question: Astra Co is considering introducing a bonus system based on

Astra Co. is considering introducing a bonus system based on economic value added (EVA) and has short-listed two bonus formulas. The first one would simply compute the bonus as a percentage of EVA, such that Bonus = x percent of EVA = x% × EVA The second bonus formula will make the bonus dependent also on the improvement in EVA from one year to another so that Bonus = y percent of EVA + z percent of DEVA
= y% × EVA + z% × DEVA (2)
a. Suppose that the firm anticipates that its EVA will be $16 million this year,
$20 million next year, and $24 million the year after. If the bonus formula (1) is chosen, x would be equal to 2 percent. If the bonus formula (2) is preferred, y would be equal to 1 percent and z to 7.5 percent. What would be the three years' cumulative bonus for each of the two formulas?
b. Suppose now that the expected EVA will be -$24 million this year, -$20 million next year, and -$16 million the year after. With the same value of x, y, and z as in the previous question, what would be the three years' cumulative bonus for each of the two formulas?
c. Which formula would you advise Astra to use?



Sale on SolutionInn
Sales0
Views93
Comments
  • CreatedMarch 27, 2015
  • Files Included
Post your question
5000