Sidney, the head of new product development, has decision rights over what new product to develop. Once Sidney has decided which product to develop, her effort level will impact the success of the product.

She can choose either New Product A or New Product Project B. The cash flows and present value of the cash flows with low and high effort on Sidneys part are shown below for both projects. High effort improves the cash flows by 10% versus low effort. The present value of the cash flows is calculated with a 7% discount rate which is assumed to be the shareholders discount rate.

New Product A: Cash Flows in Millions of Dollars

	Cash Flows		Present Value of Cash Flows
Year	Low Effort	High Effort	Low Effort	High Effort
1	10.00	11.00	9.35	10.28
2	15.00	16.50	13.10	14.41
3	15.00	16.50	12.24	13.47
4	5.00	5.50	3.81	4.20
5	5.00	5.50	3.56	3.92
		Total	42.07	46.28

New Product B: Cash Flows in Millions of Dollars

	Cash Flows		Present Value of Cash Flows
Year	Low Effort	High Effort	Low Effort	High Effort
1	5.00	5.50	4.67	5.14
2	5.00	5.50	4.37	4.80
3	10.00	11.10	8.16	8.98
4	20.00	22.00	15.26	16.78
5	20.00	22.00	14.26	15.69
		Total	46.72	51.39

The company shareholders would like Sidney to (1) choose the new product with the highest present value of cash flows and (2) work hard. New Product B has a higher present value than New Product A. Sidney has specific knowledge. She knows the new product present values depicted in the above tables but senior management does not.

Senior management laments that basing Sidneys annual bonus on the level of cash flows from the new product will induce her to provide high effort, but might not induce her to launch the correct new product.

Explain why basing Sidneys annual bonus on the level of cash flows from the new product might not lead her to choose New Product B.