‘Conflict between Doing Well and Doing Good?’
1. The managers know that this project was value-enhancing project to the company due to the fact that Coors already had the property, raw materials, and manpower to run the project, and the overhead costs would be low; in addition, there was a high likelihood of breaking at least even, if not turning a profit, on the operation while working to promote the company as environmentally conscious (Kwok & Rabe, 2010). The appropriate capital budgeting tool to analyze the benefits of the project is the profitability index in conjunction with the internal rate of return for the company (Shim & Siegel, 2012).
2. The relevant, incremental cash flows for this project are the cost of production, which include the direct materials for the project, the project overhead, and the direct labor costs associated with the project (Kwok & Rabe, 2010). The initial outlay for the project, the costs necessary to start the project, do not factor in to the decision, given the fact that Merrick is responsible for all of the associated startup costs to the project as a result of the partnership agreement (Kwok & Rabe, 2010). The costs and benefits over time include the potentiality for profits in the ethanol market, and an overall improvement of the Coors image as a result of their voluntary agreement to engage in a green project, thereby enhancing the company’s image as one of environmental consciousness, which works to boost consumer sales and opinions (Kwok & Rabe, 2010).
3. The appropriate opportunity cost of capital (hurdle rate) for the project will be the cost of the capital, plus the project’s risk premium (The Hurdle Rate, n.d.); something that is not possible to determine in exact numbers based on the information presented within the case study itself. The reason that this may not be determined is that the company has yet to set the appropriate risk premium, and the initial startup capital is being fronted by Merrick, meaning that Coors will need to determine the appropriate rate of potential risk that they wish to set for their inclusion within the project (Kwok & Rabe, 2010).
4. Based on quantitative analysis the project should be implemented because, based on the information presented within the case study, the benefits to Coors are greater than any potential negatives that are present within the situation, and as a result of the fact that there are not any direct negatives present at this time (Kwok & Rabe, 2010).
5. Changes of the assumptions regarding the demand for the ethanol, hourly wages, rack price of ethanol, and operational efficiency would all work to affect the value of the project because these factors have the potential for the project to cost Coors money instead of allowing them to break even from a fiscal standpoint but advance their image, or come out ahead both in image and fiscally (Kwok & Rabe, 2010). The results to the assumptions made are sensitive in that if the cost of ethanol drops, the demand for ethanol drops, operational efficiency decreases, or hourly wage increases, or some combination thereof, that factor or factors has the potential to immediately turn into a loss for Coors (Kwok & Rabe, 2010).
6. In addition to the financial analysis, the qualitative factors that should be considered prior to making the final decision on the approval of the project include whether or not the company believes the project is worth the risk, if the boost locally to brand image is worth the break even cost, and even whether or not it is the most effective or efficient use of workers for this project.
7. The conclusions that managers are able to make about the perceived tradeoff of doing well and doing good will be based primarily around what they determine the boost to the brand image would be worth, in terms of actual direct fiscal costs. These perceived tradeoff costs need to be focused solely around the business itself, as opposed to whether or not the project works to boost the project member’s individual reputation by being in at the start and conceptualization of a green initiative (Kwok & Rabe, 2010).
During the course of ethics training for supervisors and managers it may be necessary to review certain issues that may be encountered during work with organizational and departmental budgets. These ethical issues may include, but are not limited to, the roles and responsibilities of the budget in relation to social, environmental, and economic problems that are not directly influenced by or affected by the company, or vice versa. In addition, the question of the total benefit to the stakeholder should be addressed and with it whether or not a nebulous quality is worth a physical cost (Sookram & Kistow, 2012).
These considerations may have worked to reduce potential issues that arose during the case study if they had been covered as it would have been possible to see that the business was not truly affected by the process and could have instead opted to simply sell off their waste products to Merrick, as opposed to getting involved in the deal themselves, resulting in the benefit by association of doing something positive for the community while working to ensure that the company’s assets and financial overhead were protected, thereby ensuring that the company never came into the position it is in currently, wherein it needs to determine whether or not it will proceed in the deal with the third party company, Merrick.
- Campus.murraystate.edu. (n.d.). The hurdle rate. [online] Retrieved from: http://campus.murraystate.edu/academic/faculty/lguin/fin330/HurdleRate.htm [Accessed: 27 Feb 2014].
- Kwok, J. S. & Rabe, E. C. (2010). Conflict between doing well and doing good? capital budgeting case study-coors. Journal Of Business Case Studies, 6 (6).
- Shim, J. K. & Siegel, J. G. (2012). Budgeting basics and beyond. 4th ed. Hoboken, N.J.: John Wiley & Sons.
- Sookram, R. & Kistow, B. (2012). Capital budgeting and sustainable enterprises: ethical implications. Journal Of Values Based Leadership, 5 (1).