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Describe a back-loaded earnings problem and discuss which managers are likely to have the problem.

Describe a back-loaded earnings problem and discuss which managers are likely to have the problem.

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Answer #1

- A back-loaded earnings problem, as the name suggests is making a decision to choose an investment project whose earnings are concentrated towards the end of life of the projects.

- Such projects will draw more expenditure in initial years and yield little earnings with a promise to improve tremendously in future.

- This may be a case with projects having a long horizon.

- Such projects may show a positive NPV but most likely will have Negative economic profits.

Managers whose compensations are not directly linked to current earnings/ profits tend to prefer a back loaded earnings project rather than a front loaded with a belief that their current earnings are low because they are making great investments which would pay back tremendous returns in future.

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