Question

TIF 25-1 Ethics in Action 00 Danielle Hastings was recently hired as a cost analyst by CareNet Medical Supplies Inc. One of Danielle's first assignments was to perform a net present value analysis for a new warehouse. Danielle performed the analysis and calculated a present value index of 0.75. The plant manager, Jerrod Moore, is very intent on purchasing the warehouse because he believes that more storage space is needed. Jerrod asks Danielle into his office and the following conversation takes place: • Jerrod: Danielle, you're new here, aren't you? • Dantelle: Yes, I am. • Jerrod: Well, Danielle, I'm not at all pleased with the capital investment analysis that you performed on this new warehouse. I need that warehouse for my production. If don't get it, where am I going to place our output? • Dantelle: Well, we need to get product into our customers' hands. • Jerrod: I agree, and we need a warehouse to do that. • Dantelle: My analysis does not support constructing a new warehouse. The numbers don't lie; the warehouse does not meet our investment return targets. In fact, it seems to me that purchasing a warehouse does not add much value to the business. We need to be producing product to satisfy customer orders, not to fill a warehouse. • Jerrod: The headquarters people will not allow me to build the warehouse if the numbers don't add up. You know as well as I that many assumptions go into your net present value analysis. Why don't you relax some of your assumptions so that the financial savings will offset the cost? Dantelle: I'm willing to discuss my assumptions with you. Maybe I overlooked something • Jerrod: Good. Here's what I want you to do. I see in your analysis that you don't project greater sales as a result of the warehouse. It seems to me that if we can store more goods, then we will have more to sell. Thus, logically, a larger warehouse translates into more sales. If you incorporate this into your analysis, I think you'll see that the numbers will work out. Why don't you work it through and come back with a new analysis. I'm really counting on you on this one. Let's get off to a good start together and see if we can get this project accepted. What is your advice to Dantelle?

Answer 1

Advice to Danielle Hastings

Initially the analysis performed by Danielle shows a present value index of 0.75 which is less than 1 which means construction of new warehouse is not at all viable.

However Jerrod the plant manager is of the view that new warehouse will lead to additional sales.

Danielle is advised to perform the analysis again to ensure whether he has not overlooked anything and he should not relax his assumptions unless the circumstances that existed at the time of making assumptions changes.

After performing the analysis again if the index is less than 1 it is not viable for construction of new warehouse.

Danielle is advised not to relax the assumptions he made and taken into account relevant considerations like storage needs and warehouse efficiency etc.,

He is advised to put the interest of company ahead of interest of manager.