You have been asked to consider the following specific questions in preparing a report to Nationwide Horizon’s board of directors.

Q. 1. Was there a reasonable economic basis for the termination of the ten disabled workers (rather than the Nationwide Horizon employees also working for CNL)? If you do not think there is enough information, what other data would you like to be provided? (Consider the opportunity cost of using the ten workers provided by the Sheltered Workshop in contrast to the opportunity cost of using existing Nationwide Horizon staff and facilities.)

Q. 2. Could CNL be a viable business? If so, under what conditions and what level of production (and, since production is directly related to production workers, employees)?

Q. 3. Because Nationwide Horizon’s insurance company will not help pay for punitive damage awards, the directors are concerned whether an award of $20,000,000 would be compensatory, punitive, or some of each. As part of your analysis, you will need to consider the time value of money and use an interest rate for discounting. You remember reading that “corporate bond rates” are appropriate for discounting workers’ earnings to present value. Suppose the current rate is 7%. However, you also remember that since the losses are in terms of “real dollars”, you will need to adjust the interest rate to an approximately “real rate” by subtracting the inflation rate. As an estimate of the inflation rate, use the median inflation rate implied by the real and nominal prices in Table 1 of the case.

 

TABLE 1 Average Real Nominal Mfg. Rep's Nominal Earnings Revenue Commission Total Cost before Tax ($000) -129.840 -7.479 17.728 Price/Ton ($000) Sales Price (Tons) ($000) ($000) Rate 2001 2h 2002 1h 2002 2h 2003 1h 2003 2h 2004 1h 2004 2h 2005 1h 2005 2h 2006 1h ($000) 129.840 251.454 309.175 425.488 492.402 541.866 605.633 727.298 988.973 1042.133 5% 5% 5% 75 3.253 3.269 3.315 3.364 3.423 3.482 3.535 3.554 3.583 243.975 326.903 497.280 588.618 633.271 696.312 795.292 977.303 1021.067 2.004 1.997 2.004 100 150 5% 5% 5% 5% 5% 71.792 96.216 91.405 90.680 67.994 -11.670 -21.065 175 2.004 2.004 2.006 185 200 225 2.001 6% 275 285 2.002 2.003 6%