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 20 percent of end-of-year investment. The following information was included in the performance report for the division:

This Year Base Year Increase over Base Year Sales revenues $ 21,100,000 $ 20,500,000 Costs incurred R&D Expense 0 4,000,000 Depreciation and other amortization 3,850,000 3,750,000 Other costs 8,000,000 7,750,000 Division profit $ 9,250,000 $ 5,000,000 $ 4,250,000 End-of-year investment $ 40,500,000 ^a $ 34,500,000 ^aIncludes other investments not at issue here.

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."

Required:

a. What is the ROI for the base year and the current year? Ignore taxes. (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)

a-1. If R&D is expensed:

a-2. If R&D is capitalized:

b. What is the amount of the bonus that the new management team is likely to claim? (Enter your answer in dollars, not in