Assess investment options based upon cost of capital and expected returns.

The assessment requires the application of the net present value (NPV) model to assess investment options given cost of capital, commonly referred to as discount rates, and required rates of returns. You will explain the role of a discount rate in evaluating the NPV model and compare investment options as cost of capital increases or decreases. The use of a financial calculator and/or Excel will be required for this part of the assessment

Read the scenario and address all of the checklist items.

Scenario: A new product manager presents to you, the chief financial officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $30,000 by the end of Year 4, will bring both praise and approval. You explain the company uses a 13% discount rate for cash flows and project-related budgeting. You take the time to present the details of the net present value (NPV) model used to assess product proposals. The data is below.

Project Outflows to Buy Machine
Day 1 Cash Out -$90,000 13% discount rate applied.
End Year 1 Cash Repayment $30,000
End Year 2 Cash Repayment $30,000
End Year 3 Cash Repayment $30,000
End Year 4 Cash Repayment $30,000
To educate the new manager, and as CFO, you take the time to evaluate the following:

Checklist:

-Evaluate how the Time Value of Money concept results in a discounted cash flow in year 4 (an amount less than $30,000).
-Assess the investment option using a 13% cost of capital discount rate by applying the NPV model. Include values in your assessment. Provide the NPV at a 13% cost of capital discount rate. Include values in your assessment.
-Assess the investment option when a 8% cost of capital discount rate, versus a 12% cost of capital discount rate is applied. Include values in your assessment. Provide the NPV at a 7% cost of capital discount rate.
-Submit a 2- to 3-page paper with an additional title page in APA format.

Part 2: Off-Balance Sheet Accounting and Ethical Study

Apply ethical reasoning to ethical issues within the field of study.

Companies use off-balance sheet accounting so that they do not have to include certain assets and liabilities in their financial statements. Off-balance sheet accounting is often used to make the balance sheet look like the company has less debt than it actually does. One method used by companies to achieve off-balance sheet accounting is classifying capital leases as operating leases.

New GAAP accounting rules and the Sarbanes–Oxley Act now require that capital leases must be included on the balance sheet as both an asset and liability. However, leases with a duration of less than 12 months and other long-term leases are still excluded from this reporting.

Off-balance sheet accounting is beneficial to companies as it eliminates both assets and debt from the balance sheet, improves companies’ liquidity ratios such as its current ratio and quick ratio, and lowers leverage ratios such as debt to equity and debt to asset.

You are a new accountant for a company and have discovered that the company’s management has formed a new corporation that will build a new corporate headquarters for the company and then lease the asset to the company on a 30-year lease. Thus, allowing the company to employ off-balance sheet accounting for the new assets. The arrangement will also allow management to make additional income from their new venture.

Scenario: The board of directors, shareholders, and stakeholders are just now learning of this arrangement to employ off-balance sheet accounting for the new office building and of management’s profit arrangement from the new company.

An alternative to this arrangement would be a sale leaseback.

Checklist:
-Explain to what extent the corporation’s shareholders might feel the corporation breached any measures of an entity of the highest ethical standards.
-Explain to what extent the corporation’s board of directors might ever feel that management breached any measures of an entity of the highest ethical standards.
-Use at least two of the ethical viewpoints as presented in ethical approaches to provide the ethical reasoning to address your company’s use of off-balance sheet accounting and managements profiting from the arrangement. Specify the approaches you use.