The project described in the case study allows a study of various business issues including environmental management, operations management, accounting, and finance. Thus, the case gives the reader sufficient information to practice the entire capital budgeting process which includes determining and predicting cash flows, using capital budgeting tools, and carrying out sensitivity and scenario analysis (Kwok and Rabe, 2010). The reader focuses on the capital budgeting aspect of the case as well as the cash flows involved. The paper also discusses the potential reduction of waste disposal cost and the creation of revenues from the production of ethanol. Overall, the case presents an example of coexistence of company performance and ethicality by showing the way a company can generate profits while carrying out environment-friendly projects.
To determine whether this project is value-enhancing to the company, mangers evaluate the relevant cash flows associated with the project. The cost of production is one of the most significant cash flows and consists of direct material, direct labor, and overhead. Managers also consider the startup cost which involves the cost of infrastructure, initial training, machinery and equipment, and shipping and testing of equipment. The most appropriate capital budgeting tool to analyze the benefit of the project is net present value (NPV). NPV can handle several discount rates with no problems. Every cash flow can be discounted separately.
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The first cost considered is the purchase of gasoline. To produce pure ethanol fuel graded ethanol, the company would need to add 5% of gasoline, which costs $1.09 per gallon. The freight costs are $300 per truck for 30 trucks every day. The average wages for factory workers is $9.33 per hour. The project would require 7 workers for each of the three 8-hour shifts every day. The potential profits from ethanol are 20 cents per gallon. The production capacity in the first year of production is 1.5 gallons per year, and the rate is expected to increase by 15% over the following three years.
The opportunity cost associated with the project involves the ethanol recovered for the company’s energy needs. The project requires the company to stop burning ethanol in the boilers. Previously this practice saved the company about 2% of the plant fuel costs.
In this project, implementation should be based on both qualitative analysis and quantitative analysis. The managers need to consider the social, environmental, and economic issues associated with the project. Economically, the project is predicted to be a success given the benefits linked to diversification. Regardless, there are qualitative issues that also have to be emphasized including, providing positive public relations for the organization carrying out environmental-friendly projects, providing ethanol additives tat reduce the carbon contentment of the environment, and the reduction of VOC emission that causes air pollution at an estimated savings of $33 per tC of Carbon (IV) oxide.
Assumptions make up the basis of project planning and fill up the gaps between recognized proven fact and complete guesswork. In this project, every assumption made is an “educated guess” (De Bruijn and Ten Heuvelhof, 2010 ) However, initial assumptions are rarely static. Changes in the assumption are almost sure to affect the value of the project in any direction. Changing circumstances in operational efficiency, for instance, may remove or alter previously declared constraints. In any case, the value of the project will not remain the same.
Assumptions, together with known facts, direct the formulation of the project plan, and provide the actionable foundation for planned operations, resource assignments, budgets, and schedules (De Bruijn and Ten Heuvelhof, 2010 ). While different assumptions in the project present varying levels of certainty, they are all significant for decision-making. It follows, therefore, that the results of implementing the project are very sensitive to the assumptions made.
A vital component of capital budgeting is that decisions regarding project approval should not be entirely dependent on financial analysis. There are other qualitative factors of the proposed project that need to be considered. Such factors include, the safety of workers and the public, necessity of maintaining existing product lines, entry into new product line, and availability of suitable technology, environmental constraints, and government regulations.
The conclusion managers can make concerning the perceived tradeoff of doing well and doing good is that the two are not mutually exclusive. From the case, it can be seen that it is possible for a company to gain large profits while at the same time ensuring that its projects are environment-friendly.
The Consequences of Unethical behavior in Budgeting
Many companies today suffer greatly as a result of unethical budgeting practices in various forms. Both employees and management level people in the organization can take part in various unethical games of budgeting. The most common instance of unethical budgeting is budget slack, which is the intentional exaggeration of budgeted costs or under-estimation of budgeted revenue ( Langevin and Mendoza, 2010 ). Such behavior allows managers to “make their numbers,” which is vital for them, especially in companies where performance appraisals and bonuses go hand in hand with obtaining the budgeted numbers.
Unethical budgeting brings about interferences in corporate performance as employees only have an incentive to achieve the goals stated in the budget. Since unethical budgeting mostly involves setting low goals, the company is less likely to reach its potential within a given period ( Langevin and Mendoza, 2010 ). When unethical budgeting goes on for several years unchecked, the organization is likely to find that its general performance has gone down as compared to that of other companies which carry out proper budgeting. Overall, unethical budgeting has long-term adverse impacts on the profitability and competitive positioning of the company.
References
Kwok, J. S., & Rabe, E. C. (2010). Conflict between doing well and doing good Capital budgeting case study—Coors. Journal of Business Case Studies, 6(6), 123–130. Retrieved from the Walden Library using the ProQuest Central (Legacy Platform) database: http://search.proquest.com.ezp.waldenulibrary.org/docview/818384065
Langevin, P., & Mendoza, C. (2010, May). How can organizational justice moderate the unethical behaviors induced by budgeting systems. In European Accounting Association 33rd Annual Congress. Istanbul, Turkey .
De Bruijn, H., & Ten Heuvelhof, E. (2010). Process management: why project management fails in complex decision making processes . Springer Science & Business Media.
