please help me asap P6-3 (L02,4) (Analysis of Alternatives) Assume that Wal-Mart Stores, Inc. has decided to surface and maintain for 10 years a vacant lot next to one of its stores to serve as a parking lot for customers. Management is considering the following bids involv- ing two different qualities of surfacing for a parking area of 12,000 square yards. Bid A: A surface that costs $5.75 per square yard to install. This surface will have to be replaced at the end of 5 years. The annual maintenance cost on this surface is estimated at 25 cents per square yard for each year except the last year of its service. The replacement surface will be similar to the initial surface. Bid B: A surface that costs $10.50 per square yard to install. This surface has a probable useful life of 10 years and will require annual maintenance in each year except the last year, at an estimated cost of 9 cents per square yard. and the machine urs A and B will be able to perform the required year-end maintenance, that Ellison's cost of funds is P6-9 (L02,4) (Analysis of Business Problems) James Kirk is a financial executive with McDowell Enterprises. Although James Kirk has not had any formal training in finance or accounting, he has a "good sense" for numbers and has helped the company grow from a very small company ($500,000 sales) to a large operation ($45 million in sales). With the business growing his head." He therefore has decided to hire a new employee with "numbers" expertise to help him. As a basis for determining steadily, however, the company needs to make a number of difficult financial decisions in which lames Kirk feels a little "over whom to employ, he has decided to ask each prospective employee to prepare answers to questions relating to the following situations he has encountered recently. Here are the questions. (a) In 2016, McDowell Enterprises negotiated and closed a long-term lease contract for newly constructed truck term, and freight storage facilities. The buildings were constructed on land owned by the company. On January 1, 2017, McDowell took possession of the leased property. The 20-year lease is effective for the period January 1, 2017, through December 31, 2036. Advance rental payments of $800,000 are payable to the lessor (owner of facilities) on January 1 of each of the first 10 years of the lease term. Advance payments of $400,000 are due on January 1 for each of the last 10 years of the lease term. McDowell has an option to purchase all the leased facilities for $1 on December 31, 2036. At the time the lease was negotiated, the fair value of the truck terminals and freight storage facilities was approximately $7,200,000. If the company had borrowed the money to purchase the facilities, it would have had to pay 10% interest. Should the company have purchased rather than leased the facilities? (b) Last year the company exchanged a piece of land for a non-interest-bearing note. The note is to be paid at the rate of $15,000 per year for 9 years, beginning one year from the date of disposal of the land. An appropriate rate of interest for the note was 11%. At the time the land was originally purchased, it cost $90,000. What is the fair value of the note? (c) The company has always followed the policy to take any cash discounts on goods purchased. Recently, the company purchased a large amount of raw materials at a price of $800,000 with terms 1/10, n/30 on which it took the discount. Some Financial Products employees decided to return their bonuses. Mr. Poling indicated that he intended to return his bonus. "Fifteen of the top 20 recipients of the retention bonuses have agreed to give back a total of more than $30 million in payments." Other Financial Products employees opted to keep their bonuses, perhaps the most notable being Jake DeSantis, a Financial Products unit executive who received an after-tax bonus of $742,006.40. On March 25, 2009, in an Op-Ed contribution to the New York Times, DeSantis published an open letter to AIG's CEO, Edward Liddy, wherein he resigned from his AIG position. His letter read in part: After 12 months of hard work dismantling the company-during which A.I.G. reassured us many times we would be rewarded in March 2009-we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company. 14 I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down. With respect to his intention to not return the retention bonus, DeSantis wrote, I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.'s or the federal government's budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need. DeSantis's Op-Ed piece stimulated much discussion regarding the proper response to the retention bonus fiasco. Did DeSantis do the right thing? This case was written by Michael K. McCuddy, The Louis S. and Mary L. Morgal Chair of Christian Business Ethics and Professor of Management, College of Business Administration, Valparaiso University. Discussion Questions 1. What types of work behaviors did AIG intend to encourage through its retention bonus plan? 2. Which needs seem to be important to the employees of AIG's Financial Products unit? 3. Using the model of the individual-organizational exchange relationship, explain the relationship that employees of AIG's Financial Products unit believed they had with the company. How was this exchange relationship violated? 4. Which motivation theory do you think has the most relevance for understanding the responses of the Financial Product employees to the implementation and unraveling of the retention bonus plan? Explain the reasoning behind your answer. 5. The amount of compensation earned by executives as well as by professional athletes and famous actors/actresses and musicians often sparks emotionally charged debate. Do you believe the $1 million plus retention bonuses received by seventy-three employees of AIG's Financial Products was excessive? Why or why not? 6. What would you have done if you were one of the seventy-three Financial Products employees who received a retention bonus of $1 million or more? Explain the reasoning behind your answer. MNGT 416 Case #1.docx Admission Requirements Favorites Case Study CONTROVERSIAL RETENTION BONUSES AT AIG American International Group (AIG), a behemoth insurance and financial services company, became notoriously famous in early 2009 for the payment of $165 million in retention bonuses to employees in its Financial Products unit. This was the same unit that was instrumental in bringing AIG to its knees and necessitating the infusion of billions of dollars in U.S. government bailout money. Although the near-collapse of AIG was significantly influenced by "soured trades entered into by the company's Financial Products division," the operations of other AIG units, such as the financial gambles of its Investments unit, helped cripple the company as well. Rapidly mounting financial losses had been occurring in the Financial Products unit for some time. Consequently, AIG decided to unwind the business and shut it down. In early 2008, employees in the unit were asked to remain with the company through the shutdown and, essentially, to work themselves out of a job. To entice talented employees to stay and work, a contractual retention bonus plan was instituted. According to a report in The Washington Post, the Financial Products employees were repeatedly assured that AIG would honor these contractual obligations. The bonus plan was highly favorable to AIG's Financial Products employees, as there was no firm connection to their job performance. The unit's employees were paid bonuses totaling $423 million in 2007, despite a paper loss of $11.5 billion on toxic real estate assets. The 2008 bonus plan, which was approved in March of that year just as the unit's losses were beginning to surface, was "designed to kick in without regard to paper losses." For 2008, paper losses on the toxic real estate assets ballooned to $28.6 billion, and total losses were more than $40 billion. According to New York Attorney General Andrew Cuomo, who was threatening legal action against AIG, seventy-three Financial Products employees received $1 million or more in bonus payments. The top recipient, identified by The Wall Street Journal as Douglas Poling, received more than $6.4 million, whereas the next half-dozen top bonus recipients got more than $4 million each. In addition, another fifteen employees received $2 million or more, and fifty-one other employees received $1 million or more. "Of those people collecting more than $1 million, eleven have already left the company, Mr. Cuomo's office said." When the retention bonuses were paid in March 2009, the U.S. Congress, President Obama's administration, and the public were outraged. Under intense political pressure, AIG's CEO Edward Liddy, who was working for only $1 a year, asked the "bonus recipients to cough up half their pay, despite fearing that resignations would follow." In defense of the bonuses, however, Gerry Pasciucco, head of the Financial Products unit, observed that the "top bonus recipient, Douglas Poling, had successfully sold off several holdings in his area of responsibility, infrastructure and energy investments. He's done an excellent job at the task of unwinding his book, of realizing value." In the ensuing emotionally charged days, employees of the Financial Products unit pondered what to do. According to one account, "employees have huddled in small groups in conference rooms off the division's main trading floor in Wilton, Conn., debating what to do. Some have expressed worries about retaliation. One employee said he had instructed his wife to call the police in the event his identity became known and a news truck appeared at his home. Others commiserated that their children have been verbally abused in school. Employees have passed around emails from colleagues who opposed returning the payments."