Question: Pay plan and suboptimization Thomas Owan is a division manager of Weatfarl Inc. He is in the process of evaluating a $3,882,000 investment. The following
Pay plan and suboptimization
Thomas Owan is a division manager of Weatfarl Inc. He is in the process of evaluating a $3,882,000 investment. The following net annual increases, before depreciation, in divisional income are expected during the investments five-year life:
| Year 1 | $ | 278,000 | |
| Year 2 | 496,100 | ||
| Year 3 | 735,300 | ||
| Year 4 | 3,266,300 | ||
| Year 5 | 2,918,400 |
All company assets are depreciated using the straight-line method. Owan receives an annual salary of $502,500 plus a bonus of 3 percent of divisional pre-tax profits. Before consideration of the potential investment project, he anticipates that his division will generate $3,882,000 annually in pre-tax profit.
a. Compute the effect of the new investment on the level of divisional pre-tax profits for years 1 through 5. If the effect is negative, enter your answer as a negative number.
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
| Year 4 | $ |
| Year 5 | $ |
b. Determine the effect of the new project on Owans compensation for each of the five years. If the effect is negative, enter your answer as a negative number.
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
| Year 4 | $ |
| Year 5 | $ |
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