Proposed pollution control project -memorandum, Financial Management


Memo to: Blackwater plc Main Board.

Subject: Proposed Pollution Control Project.

From: Lower down the hierarchy.

Date: That'll be the day.

On purely non-financial criteria it is able to be suggested that as a regular violator of the environmental regulation our company has a moral responsibility to install this equipment so long as it doesn't jeopardise the long-term survival of the company.

But the figures appended propose that the project isn't wealth-creating for Blackwater's shareholders as the EV of the fines is less than the expected NPV of the project. Nevertheless this conclusion relies on accepting the validity of the probability distribution which is debatable. Not merely are the magnitudes of the fines merely estimates but the probabilities shown are subjective. Different decision-makers may possibly well arrive at different assessments which could lead to the opposite decision on financial criteria.

More basically the use of the expected value principle is only reliable when the probability distribution approximates to the normal. In this situation it is slightly skewed toward the lower outcomes. But more considerably if the distribution itself is examined more closely it appears to indicate that there is a 70% chance (0.5+0.2) of fines of at least $ 1 4m which exceeds the NPV of the costs of the pollution control project. In other phase there is a 70% chance that the project will be valuable. It so seems perverse to reject it on these figures.

Furthermore given that Blackwater is a persistent offender as well as that the green lobby is becoming more influential there should be a strong likelihood that the level of fines will increase in the future suggesting that the data given are under-estimates. Higher expected fines would additionally enhance the appeal of the project.

It is as well possible that the company may sell more output perhaps at a higher price if it is perceived to be more environmentally friendly and if customers are swayed by this. This may be less probable for industrial companies although it would create opportunities for self-publicity on both sides. Additionally there may be more general image effects which may foster enhanced self-esteem among the workforce as well as increasing the acceptability of the company in the local community.

It is still possible that the company's share price may benefit from managers of ethical investment funds deciding to comprise Blackwater in their portfolios.

Finally this may be merely a short-term solution. As the operating life of the equipment is merely four years we will face a further investment decision after this period although technological and legal changes may well have altered the situation by then.

Posted Date: 7/9/2013 3:27:15 AM | Location : United States

Related Discussions:- Proposed pollution control project -memorandum, Assignment Help, Ask Question on Proposed pollution control project -memorandum, Get Answer, Expert's Help, Proposed pollution control project -memorandum Discussions

Write discussion on Proposed pollution control project -memorandum
Your posts are moderated
Related Questions
Question 1: (a) Explain fully the difference between ‘Pay-As-You-Use' and ‘Pay-As-You-Go' methods of financing infra-structural projects. (b) Write short notes on any ONE of

Workers interest in participation is also influenced by certain personnel or group characteristics. For example several research studies have shown that both very low and very high

how can management use financial ratios

The following information pertains to Fairways Driving Range, Inc.: The company is considering operating a new driving range facility in Sanford, FL. In order to do so, they wi

Most of the time, an investor buys a bond between coupon payments. In such transaction, the buyer must compensate the seller of the bond for the

Examples of ICQ's and ICEQ's ICQ: "Does an authorised senior person review purchase invoices before payment is made?" ICEQ: "Can payments be made on purchase invoices th

TYPES OF WORKING CAPITAL Working capital can be split up into two categories on the basis of time. They are Permanent Working Capital and Temporary or Variable Working capital

The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net income

1. Why do you think you are asked to perform valuation given an array of discount rates? a. Would it not be more accurate to utilize, for example, CAPM to calculate cost of equi