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	$