Running head: ETHICS IN BUDGETING

Ethics in Budgeting

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How do managers 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?

Managers can know whether the project is value-enhancing or not through investment

analysis, which involves cost-benefit analysis. The company management can achieve this

through an in-depth examination of the project against its objective of reducing additional VOC

emissions while minimizing legal costs. Coors would earn utmost reputation from the

government and other environmental conservation agencies. Additionally, the company would

gain competitive advantage through customer loyalty and an extended support. Six key methods

are used to evaluate projects and to decide whether or not they should be accepted: (1) net

present value (NPV), (2) internal rate of return (IRR), (3) modified internal rate of return

(MIRR), (4) profitability index (PI), (5) payback, and (6) discounted payback. We explain how

each method is applied, and then we evaluate how well each performs in terms of identifying

those projects that will maximize the firms stock price.

In this case,the company can employ the use of Net Present Value (NPV) to analyze the benefits

of the project. NPV is a tool for measuring profitability in budgeting and it represents the extent

to which cash inflow equals or exceeds the amount of capital intended to fund the project. NPV

is calculated as below;

NPV= {Net Period Cash Flow/ (1+R) T} - Initial Investment. Where; R= the rate of

investment and T= number of time periods.

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What are the relevant, incremental cash flows for this project? What is the initial outlay?

what are the costs and benefits over time?

The relevant incremental cash flows are the direct cost of raw materials, including freight

costs amounting to $ 9000 per day. Another cost is the direct labor cost of $ 9.33 per hour for

each of the seven employees working for three - eight hour shift daily. The project also has

overhead costs which include; utilities, maintenance costs and administrative expenses. The debt

information reveals that the company has an initial capital of $ 244,000. The main benefits of the

project include; reduced VOC emissions, providing ethanol additives that minimize carbon

content in the environment and strengthening the company's public relations.

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?

The hurdle rate for the project is the company's expected rate of return, which is

estimated at o.65%. No, the company should not use its weighted average cost of capital

(WACC). Considering the fact that the company operates in a rather competitive industry, it

would be prudent for the company to review its WACC to match the competitor's rate.

Otherwise, the company risks being faced out of business due to the project cost-overrun. The

implication is that the company would be selling ethanol at relatively low prices while incurring

heavy production costs.

Should the project be implemented based on quantitative analysis?

No. in spite of the fact that the company would be seeking to achieve increase in both

production and sales volumes, and ultimately growth, the primary aim of the project is to
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produce reduce VOC emissions. Therefore, the entire project would entail improving ethanol

quality through minimizing carbon content in the by-products and the general environment.

Would the changes of the assumptions about the demand for 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?

Yes. An increase in demand for ethanol would require an increase in production thereby

necessitating production cost review. Besides, hourly wages are sporadic because of changes in

government regulations and global labor demands. Thus, the cost of human capital would

increase substantially rendering the project infeasible in the future. Rack price of ethanol would

change depending on the prevailing market prices and an increase in the same would reduce

sales volume. The rate of VOC emissions depends on operational efficiency. Inefficacies in

production would result in emission of more carbon gases into the atmosphere thereby lowering

the value of the project.

In addition to the financial analysis, what qualitative factors should be considered prior to

making the final decision on the approval of the project?

Impacts of the project on the environment should be considered before adopting any

project. Therefore, the company should undertake an environmental impact assessment to

ascertain the environmental suitability of the project. Additionally, government regulation is a

necessary factor since the project has to meet laid down legal procedures before it can be

implemented. Moreover, the company needs to ensure that the project meets ethical standards

and social obligation.

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What conclusion can managers make about the perceived tradeoff of doing well and doing

good?

In brief, managers should realize that in as much as they have growth prospects, it is

important to do just what is right for everyone. Doing well is about the company's overall

performance while doing good entails upholding ethical standards in the ethanol production.

Going forward, firms that visualize success have to do good. Therefore, doing good is a

prerequisite for doing well.

Referencing

Kwok, J. S., & Rabe, E. C. (2010). Conflict between doing well and doing good? Capital

budgeting case study-Coors, Journal of Business Case Study, 6(6), 123-130.