Anne Green leveraged her love of plants and gardens into a highly acclaimed garden shop. Over the past 20 years, the business expanded rapidly and now operates in 14 states. Anne firmly believes in giving people a free hand but exercising careful control as well. She likens managing people to growing gardens. “Once you give them the necessary tools for success and have helped through the initial growth, it is best to step aside to let them grow and thrive. But you must be prepared to pinch and prune for the best long-term results.” Thus, while seen as a place that values autonomy, Annie’s Gardens also has a reputation for strongly linking compensation to performance. The following describes some key aspects of the firm.................

Required:

a. What is Anne’s implicit classification of stores (as cost/profit or investment centers).

Do you agree with this classification?

b. Deborah calculates that the greenhouse has an NPV of $7,434 before considering taxes, and that its payback period is just under three years. However, Don does not seem eager to forward the proposal to Anne for her approval. What might be a source of his reluctance? (Note: You might wish to verify these estimates. For simplicity, assume that all cash flow, including those for the current year, take place at the end of the year. Also calculate the NPV as at the end of the current year. Verification is not needed to answer the question.)

c. Critically evaluate the choice of ROI as a performance metric and the way in which Annie’s Gardens computes the measure. In particular, should Annie include or exclude some items when computing income or investment? Should she value them differently? What are the costs and benefits of using alternate measures such as residual income in place of ROI?

d. Discuss the structure of the compensation plan. What might be reasons for starting the bonus at levels below the target? for a cap on the payout ratio? for computing the bonus pool at the regional level?