Pharmaceutical firms, oil and gas companies, and other ventures inevitably incur costs on unsuccessful investments in new projects (e.g., new drugs or new wells). For oil and gas firms, a debate continues over whether those costs should be written off as a period expense or capitalized as part of the full cost of finding profitable oil and gas ventures. For pharmaceutical firms, GAAP in the United States is clear that R&D costs are to be expensed when incurred. Pharm-It has been writing R&D costs off to expense as incurred for both financial reporting and internal performance measurement. However, this year a new management team was hired to improve the profit of Pharm-It's Cardiology Division. The new management team was hired with the provision that it would receive a bonus equal to 10 percent of any profits in excess of base-year profits of the division. However, no bonus would be paid if profits were less than 18 percent of end-of-year investment. The following information was included in the performance report for the division. Sales revenues Costs incurred R&D Expense Depreciation and other amortization Other costs Division profit End-of-year investment "Includes other investments not at issue here. Increase over This Year $20,500,000 Base Tear Dane Year $20,000,000 4,000,000 3,900,000 8,000,000 3,750,000 7,750,000 $ 8,600,000 $45,500,000 $ 4,500,000 $37,500,000 $4,100,000 During the year, the new team spent $5 million on R&D activities, of which $4,500,000 was for unsuccessful ventures. The new management team has included the $4,500,000 in the current end-of-year investment base because "You can't invent successful drugs without missing on a few unsuccessful ones."