Application 1 Ethics in Budgeting
Although budgeting may appear to be a straightforward set of calculations, there are still many areas in the budgetary process where unethical practices may occur. By misusing tools or calculations, a deceitful picture of an organization’s financial reality can be painted, misleading investors, employees, or stockholders.
For this Application, you will first need to review the case study, “Conflict Between Doing Well and Doing Good?” found in this week’s Resources. (Other uploaded attachment)
Formulate a brief response for each of the seven questions listed at the end of the case study. In addition, comment on some potential consequences of unethical behavior in budgeting. Find examples in the news to demonstrate the consequences.
1. How do mangers know whether this project is a value-enhancing project to the company? What is the appropriate capital budgeting tool to analyze the benefits of the project?
2. What are the relevant, incremental cash flows for this project? What is the initial outlay? What are the costs and benefits over time?
3. What is the appropriate opportunity cost of capital (hurdle rate) for the project? Should Peter Coors use the company’s weight average cost of capital and why?
4. Should the project be implemented based on quantitative analysis?
5. Would changes of the assumptions about the demand for the ethanol, hourly wages, rack price of ethanol and operational efficiency affect the value of the project? How sensitive are the results to the assumptions made?
6. In addition to the financial analysis, what qualitative factors should be considered prior to making the final decision on the approval of the project?
7. What conclusion can managers make about the perceived tradeoff of doing well and doing good?