Sometimes compensation packages include bonuses designed to provide performance incentives to employees

P 13-5 Bonus compensation; algebra

Sometimes compensation packages include bonuses designed to provide performance incentives to employees. The difficulty a bonus can cause accountants is not an accounting problem, but a math problem. The complication is that the bonus formula sometimes specifies that the calculation of the bonus is based in part on the bonus itself. This occurs anytime the bonus is a percentage of income because expenses are components of income, and the bonus is an expense.

Regalia Fashions has an incentive compensation plan through which a division manager receives a bonus equal to 10% of the division’s net income. Division income in 2011 before the bonus and income tax was $150,000. The tax rate is 30%.


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ADK Delivery is a small company that transports business packages between San Francisco and Los Angeles

Problem 16-16 Using Present Value Techniques to Evaluate Alternative Investment Opportunities

ADK Delivery is a small company that transports business packages between San Francisco and Los Angeles. It operates a fleet of small vans that move packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. ADK delivery recently acquired approximately $3 million of cash capital from its owners, and its president, Frank Hobb, is trying to identify the most profitable way to invest these funds.

AND SO ON

Check:
a. NPV of the vans investment: $75,608.57
b. NPV index of the trucks investment: 1.126

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