Technology firms, pharmaceutical firms, oil and gas companies, and other ventures inevitably incur costs on unsuccessful investments in new projects $($e$.$g$.,$ new technologies or new drugs$).$ 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. However, GAAP in the United States is clear that R&D costs are to be expensed when incurred.

Luther Technologies, an automotive supplier, 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 Luther's Self$-$Driving Division. The new management team was hired with the provision that it would receive a bonus equal to $12\mathrm{.}5$ percent of any profits in excess of base$-$year profits of the division. However, no bonus would be paid if profits were less than $15$ 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 $ $13,500,000$ $ $13,000,000$

Costs incurred

R&D expense $02,900,000$

Depreciation and other amortization $3,300,0002,700,000$

Other costs $5,300,0005,200,000$

Division profit $ $4,900,000$ $ $2,200,000$ $ $2,700,000$

End$-$of$-$year investment $ $29,800,000$a $ $40,000,000$

aIncludes other investments not at issue here.

During the year, the new team spent $$3\mathrm{.}3$ million on R&D activities, of which $$3$ million was for unsuccessful ventures. The new management team has included the $$3$ million in the current end$-$of$-$year investment base because "not all great ideas make it to development."

Required:

a$.$ What is the ROI

a$-1.$ for the base year and the current year if R&D is expensed? Ignore taxes.

a$-2.$ for the current year if R&D is capitalized? Ignore taxes.

b$.$ What is the amount of the bonus that the new management team is likely to claim?

c$.$ If you were on Luther$$s board of directors, how would you respond to the new management's claim for the bonus?