question #6 Case 14-31 Ethics and the Manager

Discount rate 0.0% Now 1 2 3 4 5 Purchase of equipment 420,000 Investment in working capital 80,000 Overhaul of equipment -50,000 Salvage value of the equipment 30,000 Working capital released 80,000 Sales 850,000 850,000 850,000 850,000 850,000 Variable expenses -500,000 -500,000 -500,000 500,000 -500,000 Fixed out-of-pocket operating costs -200,000 -200,000 -200,000 -200,000 -200,000 Total cash flows (a) -500,000 150,000 150,000 100,000 150,000 260,000 Discount factor (b) Present value of cash flows (a) x (b) -500,000 150,000 150,000 100,000 150,000 260,000 Net present value (SUM B16:G16) 310,000question #6 Case 14-31 Ethics and the Manager The Fore Corporation is an integrated food processing company that has operations in over two dozen countries. Fore's corporate headquarters are in Chicago, and the company's executives frequently travel to visit Fore's foreign and domestic facilities. Fore has a fleet of aircraft that consists of two business jets with international range and six amaller turboprop aircraft that are used on shorter flights. Company policy is to assign aircraft to trips on the basis of minimizing cost; however, the practice has been to assign the aircraft based on the organizational rank of the traveler. Fore offers its aircraft for short-term lease or for charter by other organizations whenever Fore itself does not plan to use the aircraft. Fore surveys the market often in order to keep its lease and charter rates competitive. William Earle, Fore's vice president of finance, has claimed that a third business jet can be justified financially. However, some people in the controller's ofce have surmised that the real reason for a third business jet was to upgrade the aircraft used by Earle. Presently, the people outranking Earle keep the two business jets busy with the result that Earle usually flies in smaller turboprop aircraft. The third businessjet would cost $11 million. A capital expenditure ofthis magnitude requires a formal proposal with projected cash flows and net present value computations using Fore's minimum required rate of return. If Fore's president and the finance committee of the board of directors approve the proposal, it will be submitted to the full board of directors. The board has final approval on capital expendirures exceeding $5 million and has established a firm policy of rejecting any discretionary proposal that has a negative net present value. Earle asked Rachel Arnett, assistant corporate controller, to prepare a proposal on a third businessjet. Arnett gathered the following data: . Acquisition cost ofthe aircraft, including instrumentation and interior furnishing. Operating cost of the aircraft for company use. Projected avoidable commercial airfare and other avoidable costs from company use of the plane. Projected value of executive time saved by using the third businessjet. Projected contribution margin from incremental lease and charter activity. Estimated resale value of the aircraft. When Earle reviewed Arnett's completed proposal and saw the large negative net present value figure, he returned the proposal to Arnett. With a glare, Earle commented, " You must have made an error. The proposal should look better than that." Feeling some pressure, Arnett went back and checked her computations; she found no errors. However, Earle's message was clear. Arnett discarded her projections that she believed were reasonable and replaced them with figures that had a remote chance of actually occurring but were more favorable to the proposal. For example, she used firstclass airfares to regure the avoidable commercial airfare costs, even though company policy was to fly coach. She found revising the propsal to be distressing. The revised proposal still had a negative net present value. Earle's anger was evident as he told Arnett to revise the proposal again, and to start with a $100,000 positive net present value and work backwards to compute the supporting projections. mm 1. Explain whether Rachel Arnett's revision of the proposal was in violation of the IMA's Statement of Ethical Professional Practice. 2. Was William Earle in violation of the lMA's Statement of Ethical Professional Practice bt telling Arnett specically how to revise the proposal? Explain your answer. 3. Identify specic internal controls that Fore Corporation could implement to prevent unethical behavior on the part of the vice president of finance