EVALUATING BONUS PLANS. James Archer is president of Newberry Products, Inc., a large manufacturer of household cleaning supplies. Mr. Archer has a choice of two executive bonus plans: (1) Receive an immediate cash payment of $50,000 or (2)

receive a payment of $75,000 in 5 years. Mr. Archer is able to earn 10% per year on his sizable investment portfolio.

REQUIRED:

1. Which of the two bonus plans will Mr. Archer prefer? Support your answer with appropriate calculations.

2. Suppose that Mr. Archer is able to earn only 7% per year on his investment portfolio. Would his evaluation of the two plans change? Explain the effect of the decrease in the interest rate from 10 to 7%.