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, Richards will receive 200,000 options on Creighton stock in addition to a base salary of \(\$ 375,000\).

The commercial products division is considering a major investment in product development, which has a net present value of \(\$ 22,000,000\). 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.

Required
a. Discuss the potential conflict between the company's evaluation/compensation system and Richards' focus on the NPV of the investment in product development.
b. Suppose Richards currently holds stock in Creighton Aerospace with a market value of \(\$ 1,000,000\) and has options on 400,000 shares (awarded in previous years). Is this likely to acerbate or mitigate the conflict you discussed in Part a?