QUESTION ONE

Eyed Mohamad is the assistant to the financial manager at CyberSystems Limited, a company that develops software to drive network communications for personal computers. Eyed joined CyberSystems three years ago, following his graduation from university. His primary responsibility has been to evaluate capital budgeting projects and make investment recommendations to the board of directors. Eyed enjoys his job very much; he often finds himself challenged with interesting tasks, and he is paid extremely well.

In January 2021 Eyed started evaluating the capital projects that have been proposed for investment this year. One proposal calls for CyberSystems to purchase Network Products Ltd. The company that manufactures circuit boards called network cards, which are required to achieve communication connectivity between personal computers. CyberSystems packages network cards with the software that it sells, but it currently purchases those circuit boards from another manufacturer. The proposal, which was submitted by Mrs Nadine Wilson, CyberSystems' CEO, suggests that the company might reduce costs and increase profit margins by producing the network cards in-house.

Eyed barely had time to scan the proposal when he was summoned to Mrs Nadine Wilson's office. The meeting was short and to the point. Mrs Wilson instructed Eyed to 'make the numbers for Network Products look good because we want to buy that company '. She also gave Eyed an evaluation of Network Products completed two years ago by an independent appraiser that suggests Network Products might not be worth the amount that CyberSystems is willing to pay. Mrs Wilson instructed Eyed to find a way to rebut the findings of the report.

Eyed was troubled by the meeting. His gut feeling was that something was wrong, but he hadn't yet had time to carefully examine the proposal. In fact, his evaluation was very cursory, and he was far from making a final decision about the acceptability of the proposed capital budgeting project. Eyed felt he needed much more information before he could make a final recommendation.

Eyed has spent the entire day examining the appraisal report provided by Mrs Wilson and trying to gather additional information about the proposed investment. The report contains some background information concerning Network's operations, but crucial financial data are missing. Further investigation into Network Products has produced little information. Eyed has discovered that the company's shares are closely held by a small group of investors. These investors own numerous businesses and contribute generously to the local university, which happens to be Mrs Wilson's alma mater. In addition, Eyed's secretary has informed him that the gossip around the office suggests that Mrs Wilson and the owners of Network Products Ltd are old university buddies and that she might even have a stake in Network Products Ltd.

This morning, Mrs Wilson called Eyed and repeated her feelings concerning the purchase of Network Products. This time she said: 'We really want to purchase Network Products. Some people might not believe so, but it's a very good deal. It's your job to make the numbers work - that's why we pay you the big pay' As a result of the conversation, Eyed has the impression that his job might be in jeopardy if he doesn't make the 'right' decision. This added pressure has made Eyed very tense.

REQUIRED

1. What is the ethical dilemma that Eyed Mohamad is facing?
2. What should Eyed Mohamad do to overcome this situation?

Should rumours and ambiguities be considered in the capital budgeting analysis? Explain your view.