Thomas Company recently initiated a post-audit program. To motivate employees to take the program seriously, Gains established a bonus program. Managers receive a bonus equal to 10 percent of the amount by which the actual net present value exceeds the projected net present value. Victoria Bolt, manager of the North Western Division, had an investment proposal on her desk when the new system was implemented. The investment opportunity required a $250,000 initial cash outflow and was expected to return cash inflows of $90,000 per year for the next five years. Thomas Companys desired rate of return is 10 percent. Ms. Bolt immediately reduced the estimated cash inflows to $70,000 per year and recommended accepting the project.

Please answer:

A) Assume that the actual cash inflows turn out to be $91,000 per year. Determine the amount of Ms. Bolts bonus if the original computation of net present value were based on $90,000 versus $70,000

B) Is Ms. Bolts behavior in violation of any of the standards of ethical professional practice in Exhibit 10.19 of Chapter 10?

C) Speculate about the long-term effect the bonus plan is likely to have on the company

D) Recommend how to compensate managers in a way that discourages gamesmanship.