Return on Investment Ethical Considerations

Jason Kemp was torn between conflicting emotions. On the one hand, things were going so well. He had just completed six months as the assistant financial manager in the Electronics Division of Med-Products Inc. The pay was good, he enjoyed his coworkers, and he felt that he was part of a team that was making a difference in American health care. On the other hand, his latest assignment was causing some sleepless nights. Mel Cravens, his boss, had asked him to "refine" the figures on the division's latest projecta portable imaging device codenamed ZM. The original estimates called for investment of $15.6 million and projected annual income of $1.87 million. Med-Products required an ROI of at least 15% for new project approval. So far, ZM's rate of return was nowhere near that hurdle rate. Mel encouraged him to show increased sales and decreased expenses in order to get the projected income above $2.34 million. Jason asked for a meeting with Mel to voice his concerns.

Jason: Mel, I've gone over the figures for the new project and can't find any way to get the income above $1.9 million. The salespeople have given me the most likely revenue figures, and production feels that the expense figures are solid.

Mel: Jason, those figures are just projections. Sales doesn't really know what the revenue will be. In fact, when I talked with Sue Harris, our sales vice president, she said that sales could range from $1.5 million to $2.5 million. Use the higher figure. I'm sure this product will justify our confidence in it!

Jason: I know the range of sales was that broad, but Sue felt the $2.5 million estimate was pretty unlikely. She thought that during the first 5 years or so that ZM sales would stay in the lower end of the range.

Mel: Again, Sue doesn't know for sure. She's just estimating. Let's go with the higher estimate. We really need this product to expand our line and to give our division a chance to qualify for sales-based bonuses. If ZM sells at all, our revenue will go up, and we'll all share in the bonus pool!

Jason: I don't know, Mel. I feel pretty bad signing off on ROI projections that I have so little confidence in.

Mel: (frustrated) Look, Jason, just prepare the report. I'll back you up.

Required:

1. What is the ROI of project ZM based on the initial estimates? What would ROI be if the income rose to $2.34 million? Round your answers to two decimal places.

ROI based on initial estimates	fill in the blank 1 %
ROI based on Mel's estimates	fill in the blank 2 %

2. CONCEPTUAL CONNECTION Do you agree that Jason has an ethical dilemma? Explain. Is there any way that Mel could ethically justify raising the sales estimates and/or lowering expense estimates?

1. Jason is definitely facing an ethical dilemma. a. While it is true that the sales and expense projections are estimates, they are the best ones available to him. If Jason prepares the report in accordance with Mels desires, he will be knowingly fabricating data. Even if Mel backs him up, it would still be unethical of Jason to fabricate data.
2. Jason is no facing an ethical dilemma. a. While it is true that the sales and expense projections are estimates, they are the best ones available to him. And estimates can go wrong. Estimates can be based up wishes of the top management. Jason can go ahead and make the projections as desired by Mel.
3. Jason is no facing an ethical dilemma. a. While it is true that the sales and expense projections are estimates, they are the best ones available to him. And estimates can go wrong. Estimates can be based up wishes of the top management. Jason can go ahead and make the projections as long as Mel, his boss is backing him up.

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3. What do you think Jason should do? Explain.

1. Jason should prepare the report using the figures he thinks are most descriptive of the projects potential.
2. Jason should prepare the report based on Mels suggestion and ask him to sign it.
3. Jason should prepare the report based on Mels suggestion and ask Sue to sign it

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