### In addition managers should consider the types of bias both

Assignment Help Finance Basics
##### Reference no: EM13396727

Investment projects should never be selected through purely mechanical processes. Managers should ask questions about the positive net present value. Good managers realize that the forecasts behind NPV calculations are imperfect. Therefore, they explore the consequences of a poor forecast and check whether it is worth doing more homework. They use several different tools and analysis techniques to answer their “what-if” questions.

In addition, managers should consider the types of bias, both unintentional and intentional, that may enter into the capital budgeting analysis.  As part of this assignment, you will examine the potential motivation for unethical behavior by executives that may take place in the capital budgeting process and explain how biasing cash-flow estimates can work to the advantage of the executive who intentionally inserts such bias.

Assume that you are employed by a wood milling company that is evaluating the desirability of adding a new product to their product mix.  The product would require the addition of new and different CNC (computer numerical control) milling equipment.  Your boss has asked you to analyze a project proposal and recommend whether the project should be accepted or rejected.  The most likely project estimates are:

• Unit selling price =  \$50
• Unit variable cost =  \$30
• Total fixed costs including depreciation =  \$300,000
• Expected sales =  30,000 units per year

The projects will last for 10 years and will require an initial investment of \$1 million, which will be depreciated straight-line over the project life to a final value of zero.The firm’s tax rate is 35% and the required rate of return is 12%.

Your boss recognizes that some of these estimates are subject to error and wants to better understand the risks associated with the project and alternatives for dealing with those risks.You have been asked to include a sensitivity analysis in your report.  You are also to explain how changing the discount rate might be helpful.

Your boss has heard about cash flow estimates being biased for personal gain at the company’s expense in another firm and would like to better understand that potential problem.  You have been asked to address that in your report.

The team developing the proposal estimated that variable cost and sales volume may each turn out to be as much as 10% higher or 10% lower than the initial estimate. To complete this assignment, you are to  submit  a four to five page paper  that includes the following:

Using MS Excel:

• Calculate the project's NPV for the most likely results.
• Calculate the project's NPV for the best-case scenario.
• Calculate the project's NPV for the worst-case scenario.
• Calculate the project IRR for the most likely results.

You will transfer your calculations into your final report. In a 4-5 page paper in MS Word:

A.Exhibit your Excel function entries and results, or your calculations using present value tables, for each of your NPV and IRR calculations (A-D) and provide an explanation  of all calculations

B.Explain your recommendation regarding whether the project should be accepted and a justification of your response.Provide an explanation of how adjusting the discount rate in the basic NPV model of capital budgeting deals with the problem of project risk.

C.Examine the potential motivation for unethical behavior by executives that may take place in the capital budgeting process and explain how biasing cash-flow estimates can work to the advantage of the executive who intentionally inserts such bias.

#### Questions Cloud

 Why might organization need to modify the existing code of : why might the organization need to modify their existing code of ethics? consider how you might modify the code of you Explain how does technology affect the ability to maintain : q1. how does technology affect the ability to maintain confidentiality? q2. how might an effective system satisfy the Going public gives existing shareholders a chance to sell : 1 consists of people equipment and procedures to gather sort analyze evaluate and distribute needed timely and The market for all other similarly-skilled labor services : the 2010 deep water horizon oil spill in the gulf of mexico caused a huge increase in the number of workers hired to In addition managers should consider the types of bias both : investment projects should never be selected through purely mechanical processes. managers should ask questions about State and federal statutory and regulatory enactments : as senior members of the human resources team you have been asked to give a presentation on the state of the union to Write the factors which would influence federal reserve in : your boss has chosen you to give a presentation to a number of foreign officials regarding the united states federal The project will require participation from the design : you are a manager at winsome manufacturing company a company that produces plastic storage containers and sells them to Cells employ enzymes as biological catalysts to increase or : cells use enzymes as biological catalysts to increase or accelerate the rate of reactions such as those in

### Write a Review

#### Which of these comparisons is more meaningful explain

In January 2009, American Airlines (AMR) had a market capitalization of \$1.7 billion, debt of \$11.1 billion, and cash of \$4.6 billion. American Airlines had revenues of \$23.8 billion. British Airways (BABWF) had a market capitalization of \$2.2 billio..

#### What will be effect of the price increase on the firms fcf

Depreciation and amortization charges are \$20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of \$3,000 for the year. What will be the effect of the price increase on the firm's FCF fo..

#### What is heuser after-tax cost of debt

The Heuser Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. He user believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal taxrate is 35%, what is Heuser's after..

#### Compute the present value of a two-period annuity

Q. Compute the present value of a two-period annuity of \$1 per period if the discount rate is 10 percent,  A two-period annuity of \$1 per period has a present value of \$1.808.  Find the discount rate from the present value table.

#### What is the immediate dilution effect for new stock issue

The Hamilton Corporation currently has 2 million shares of stock outstanding and will report earnings of \$6,700,000 in the current year. The company is considering the issuance of 1 million additional shares that will net \$37 per share to the corp..

#### Calculate the price of a zero coupon bond

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 6.5 percent. Assume semi-annual compounding.

#### Higher risk tends to result in a higher share price

9. Given the following statement, please indicate whether it is true or false, and why: "High cash flow is generally associated with a lower share price whereas higher risk tends to result in a higher share price." (Limit your answer to less than 100..

#### Constant marginal utility of wealth

What types of utility curves are generally associated with each of following attitudes toward risk:

#### Develop the march budget allowances for each cost center

(a) Develop the March budget allowances for each cost center. (b) Develop the budgeted overhead costing rate for each cost center and a blanket overhead costing rate for the entire company.

#### China rmb currency

What should be my research approach? What are the advantage and disadvantages of such approach? What should be my research philosophy? What are the advantage and disadvantages of such philosophy?

#### What is the implicit cost of the trade credit

Sybex Corp. sells its goods with terms of 3/8 EOM, net 30. What is the implicit cost of the trade credit?

#### For your final paper you will choose one of the health care

the final paper 8-10 pages excluding title and reference pages should demonstrate understanding of the reading