Reference no: EM133056532

SS is evaluating a project that might help the firm to increase its presence in the "green" industry by propelling the company into the leadership role in the country's quest to clean up and protect the environment. Although Tracey is not evaluating the project's acceptability, it is her responsibility to establish the hurdle rate, or weighted average cost of capital (WACC), that is used by those who conduct capital budgeting analyses. Tracey, who is a compassionate environmentalist, would like to see SS invest in the project. But, Manual, who works in the capital budgeting department, has told Tracey that preliminary analysis of the project suggests that its internal rate of return (IRR) is less than the firm's WACC, which would mean that the project is not an acceptable investment. Because Tracey feels the company should purchase the project, she is considering changing the method that she currently uses to compute the firm's WACC. If she makes the change, the hurdle rate used to evaluate the "green" project will be lower than it is currently, and thus the project might turn out to be acceptable. However, if SS bases its decision on a hurdle rate that is too low and invests a substantial amount in the project, in the future it might discover that the project actually should have been rejected. It is possible that this discovery comes too late for the firm to correct its mistake, in which case the firm might find itself in serious financial trouble.

Questions

Is there an ethical problem? If so, what is it?

Is it appropriate for Tracey to change the hurdle rate used to evaluate capital budgeting projects?

What would you do if you were Tracey?