Gaines Company recently initiated a postaudit program. To motivate employees to take the program seriously, Gaines established a bonus program.

Gaines Company recently initiated a postaudit program. To motivate employees to take theprogram seriously, Gaines established a bonus program. Managers receive a bonus equal to10 percent of the amount by which actual net present value exceeds the projected net presentop rPlanning for Capital Investments 481value. Victor Holt, manager of the North Western Division, had an investment proposal onhis 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 forthe next five years. Gaines’ desired rate of return is 10 percent. Mr. Holt immediately reducedthe estimated cash inflows to $70,000 per year and recommended accepting the project.Requireda. Assume that actual cash inflows turn out to be $91,000 per year. Determine the amountof Mr. Holt’s bonus if the original computation of net present value were based on $90,000versus $70,000.c. Speculate about the long-term effect the bonus plan is likely to have on the company.d. Recommend how to compensate managers in a way that discourages gamesmanship.Initial outayRate $250,0000.1Year012345NPV a) Amount of bonus 3.791Inflows(Actual)nflows(Budgeted)Inflows(Budgeted)I($250,000)($250,000)($250,000)$91,000$70,000$90,000$91,000…

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