43) Managerial Financial Accounting Assignments P9-17 Solution

43 Managerial - P9-17 Conflict Between Performance Evaluation and Use of NPV[LO 7 Division managers at Creighton Aerospace are evaluated and

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Unformatted text preview: P9-17 Conflict Between Performance Evaluation and Use of NPV [LO 7] Division managers at Creighton Aerospace are evaluated and rewarded based on ROI (return on investment) 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. Discuss the potential conflict between the company’s evaluation/compensation system and Delamr's focus on the NPV of the investment in product development. Suppose Delmar currently holds stock in Creighton Aerospace with a market value of $1,250,000 and has option ...
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This note was uploaded on 08/02/2011 for the course MGMT 425 taught by Professor Brown/lexner during the Spring '11 term at Kaplan University.

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43 Managerial - P9-17 Conflict Between Performance Evaluation and Use of NPV[LO 7 Division managers at Creighton Aerospace are evaluated and

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