The financial staff of North American Motors used a 30 percent discount rate to analyze a technological improvement that promised to save the company millions in quality-related costs. The financial staff recommended that top management reject the project. Production managers responded by email that they believed the new process and equipment were necessary to improve product quality, which had fallen behind that of competitors. They argued that, although quality improvements were a strategic goal of the company, the direct reduction in quality costs was only a small part of the benefits of this project.

The company’s reputation and sales would improve as the quality of its products improved.

Martha Flowers, chief financial analyst, replied to the production managers’ arguments by stating,

“You have not quantified these so-called benefits from improved company reputation, and we don’t believe it is possible to do so. Therefore, we have to evaluate this project by the numbers, and the net present value is negative. So, our recommendation is ‘no.””

The production managers complained that the use of a 30 percent discount rate was far too high.

Lead production manager Art High said, “I don’t know what thin air you have been breathing, but we almost never get a 30 percent return on investments.”

Flowers responded, “We have audited your past technology investments and found that they almost never performed as well as you said they will. Because of your unrealistic projections, we bumped up the discount rate.”

After seeing these emails and a flurry of subsequent ones that became progressively more heated, the division president took two aspirin and called you in for advice. “Make sense of this,” he said. “Write a short report that communicates what’s really going on here, and advise me what to do with this project.”

Required Write the report requested by the division president