ORGANIZATIONAL PERFORMANCE ANALYSIS AND RECOMMENDATIONS—PART 2
For this Assignment, you will continue in your role as consultant to the executive team of a midsize copper smelting company in northern Canada. As a reminder, here is a summary of the team’s current situation and need:Due to some recent changes to the local environmental air quality laws, the company’s large coal-fueled smelting furnace is now operating out of compliance due to high levels of pollutants in the exhaust gases. The regulatory agency has given the company 12 months to demonstrate compliance, after which it will be fined $1,000 per day until the operations meet the regulation. The company has two alternatives. The first alternative is to install air scrubbers to reduce the output pollutant levels. The second alternative is to convert the smelting furnace from coal to natural gas. Both alternatives will meet the current regulatory requirements, but there is a slight concern that the air scrubber solution may not meet future regulatory restrictions. The executive team wants you to perform a financial performance analysis on both alternatives using several different capital budgeting methodologies. The team also is seeking guidance on nonfinancial considerations regarding the company’s ethical and social responsibilities related to this decision.
Last week, for Part 1 of your report, you conducted a financial performance analysis on both alternatives using several different capital budgeting methodologies. This week, in Part 2 of the report, you will provide company leadership with guidance related to the company’s ethical responsibilities related to this decision.
As a reminder, you will continue adding on to the report you began developing last week. In addition to the requirements that follow, be sure to incorporate references to appropriate academic sources, such as those found in this week’s Learning Resources or those in the Walden Library.
RESOURCES
Be sure to review the Learning Resources before completing this activity.
Click the weekly resources link to access the resources.
WEEKLY RESOURCES
To prepare for this Assignment:
Return to the Module 3 Assignment Template you utilized in Week 6. With the research and readings from Week 6 and Week 7 in mind, incorporate any feedback, as needed, into your report as you complete Part 2.
BY DAY 7
Submit Part 2 of your report to the executive team. Part 2 of your report should be approximately 3–4 pages in length (excluding title page and references) and should address the following:
PART 2: ETHICAL RESPONSIBILITY
During several visits to the plant, you have overheard some employees and mid-level supervisors discussing the issues related to the smelting furnace and some potential “solutions” to the current regulatory problem. Some of these conversations are troubling because they are suggesting covering up the issue through false or misleading data reporting. Based on these conversations, you feel obligated to discuss the issue of ethical responsibility with the executive team. Be sure to address the following:
Examine the importance of ethics in managerial accounting.
Analyze how ethics, both good and bad, can affect the organization as a whole. Consider not only the financial impact but also the direct and indirect impact on stakeholders, such as employees, customers, suppliers, etc.
Propose at least two recommendations that the company could implement to help ensure high ethical responsibility at all levels of the organization.
Continue in your role as consultant to the executive team of a midsize copper smelting company in northern Canada
**Part 2: Ethical Responsibility**
**Importance of Ethics in Managerial Accounting:**
Ethics play a crucial role in managerial accounting as it involves making decisions that impact the financial well-being of the organization and its stakeholders. Managerial accountants are responsible for providing accurate and relevant financial information to support decision-making by management. Ethical behavior ensures that this information is presented truthfully and fairly, without bias or manipulation.
Ethics in managerial accounting encompass principles such as honesty, integrity, objectivity, and professionalism. It involves adhering to ethical guidelines and standards set forth by professional organizations such as the Institute of Management Accountants (IMA) and the American Institute of Certified Public Accountants (AICPA). Failure to uphold these ethical principles can lead to financial mismanagement, fraud, legal liabilities, and damage to the organization’s reputation.
**Impact of Ethics on the Organization:**
Ethics, both good and bad, can have significant impacts on the organization as a whole:
**Financial Impact:** Good ethics in managerial accounting contribute to accurate financial reporting, which enhances investor confidence, lowers the cost of capital, and improves the organization’s creditworthiness. Conversely, unethical behavior such as financial misrepresentation or fraudulent reporting can lead to financial losses, regulatory penalties, and damage to shareholder value.
**Stakeholder Relationships:** Ethical behavior fosters trust and credibility with stakeholders, including employees, customers, suppliers, and the community. Employees are more likely to be motivated and engaged in their work when they trust that management operates with integrity. Customers are more likely to remain loyal to a company that demonstrates ethical business practices. Suppliers are more inclined to maintain mutually beneficial relationships with ethical partners.
**Organizational Culture:** Ethical behavior sets the tone for the organizational culture and influences employee behavior and decision-making at all levels. A culture of integrity promotes transparency, accountability, and teamwork, fostering a positive work environment. Conversely, a culture that tolerates unethical behavior can erode trust, morale, and productivity, leading to turnover and reduced performance.
**Recommendations for Ensuring High Ethical Responsibility:**
To ensure high ethical responsibility at all levels of the organization, the company could implement the following recommendations:
**Ethics Training and Education:** Provide ongoing ethics training and education programs for employees at all levels of the organization. These programs should reinforce ethical principles, raise awareness of ethical dilemmas, and provide guidance on ethical decision-making. Training should be tailored to specific roles and responsibilities within the organization, highlighting the importance of ethical behavior in managerial accounting and financial reporting.
**Ethical Leadership and Accountability:** Establish a culture of ethical leadership and accountability by promoting ethical behavior from the top down. Company leaders should lead by example, demonstrating integrity, transparency, and fairness in their actions and decisions. Implement mechanisms for reporting ethical concerns or violations, such as anonymous hotlines or whistleblower policies, and ensure that investigations are conducted promptly and impartially.
By prioritizing ethics in managerial accounting and fostering a culture of integrity, the company can mitigate the risks associated with unethical behavior and build trust with stakeholders, ultimately contributing to long-term organizational success and sustainability.
Module 3 Assignment:
Organizational Performance Analysis and Recommendations
Part 1: The Financial Performance Analysis
Air Scrubbers
Net Present Value Using Excel to determine PV cash flow
NPV = Initial Cost + PV of Cash Flow
Present Value
Initial investment
$ (1,350,000)
PV of Annual net cash flow for 15 years
PV(rate,value1,[Value 2])
2,185,256
Net present value
$ 835,256
Payback Period = Initial Investment / Net Annual Cash Flow
6.00
Internal Rate of Return
Using Excel =IRR(M6:M21) use the IRR worksheet
14%
Average Rate of Return = Ave Net Income / Ave Book Value of investment
20.00%
Furnace Fuel Change
Net Present Value Using Excel to determine PV cash flow
NPV = Initial Cost + PV of Cash Flow
Present Value
Initial investment
$ (1,385,000)
PV of Annual net cash flow for 15 years
=PV(rate,value1,[value2])
3,059,358
Net present value
$ 1,674,358
Payback Period = Initial Investment / Net Annual Cash Flow
4.40
Internal Rate of Return
Using Excel =IRR(M26:M41) use the IRR worksheet
21%
Average Rate of Return = Ave Net Income / Ave Book Value of investment
21.68%
Air Scrubbers
IRR Worksheet
Period
Cash Flow
0
$ (1,350,000)
1
225,000
2
225,000
3
225,000
4
225,000
5
225,000
6
225,000
7
225,000
8
225,000
9
225,000
10
225,000
11
225,000
12
225,000
13
225,000
14
225,000
15
225,000
Furnance Fuel Change
IRR Worksheet
Period
Cash Flow
0
$ (1,385,000)
1
315000
2
315000
3
315000
4
315000
5
315000
6
315000
7
315000
8
315000
9
315000
10
315000
11
315000
12
315000
13
315000
14
315000
15
315000
Financial Metrics analysis
In assessing investment alternatives, such as Air Scrubbers and Furnace Fuel Change, financial analysis plays a critical role in determining the potential return on investment. Analyzing metrics such as Net Present Value (NPV), Accounting Rate of Return (ARR), Internal Rate of Return (IRR), and Payback Period empowers executives to make well-informed decisions regarding investment options and their potential returns. NPV, a fundamental metric, determines the current value of future cash inflows, considering the concept of the time value of money. It provides insight into the project’s profitability and its ability to generate value over time. Both projects exhibit positive NPVs, implying potential profitability. Air Scrubbers show an NPV of $835,256, while Furnace Fuel Change demonstrates a higher NPV of $1,674,358 over the 15-year project duration. This indicates that both projects are expected to generate positive returns, but Furnace Fuel Change appears more financially attractive with its significantly higher NPV.
Accounting Rate of Return (ARR), provides insights into the average rate of return relative to the initial investment. Air Scrubbers yield an ARR of 20.00%, while Furnace Fuel Change boasts a superior ARR of 21.68%. This suggests that Furnace Fuel Change generates higher average profits compared to Air Scrubbers, enhancing its financial appeal. Internal Rate of Return (IRR) is another crucial metric, representing the percentage return on investment, assuming reinvestment of cash flows at the same rate. Air Scrubbers show a respectable IRR of 14%, indicating a moderate return on investment. However, Furnace Fuel Change outperforms with a higher IRR of 21%, suggesting a more lucrative investment opportunity with greater potential for returns. As Magni (2010) indicates, a higher IRR indicates that Furnace Fuel Change offers a more lucrative return on investment, making it a more enticing option for potential investors. The Payback Period provides insight into the time required to recover the initial investment (Boardman et al., 2006). Air Scrubbers requires 6 years to recover the initial investment, indicating a relatively longer timeframe for payback. In contrast, Furnace Fuel Change achieves this milestone in a swifter timeframe of 4.40 years, demonstrating a more efficient use of capital and quicker return on investment. Thus, this is an indication that Furnace Fuel Change would recoup the initial investment at a faster rate, contributing to its appeal in terms of liquidity and risk mitigation.
Recommendations to the Executive Team
Upon comprehensive analysis of NPV, ARR, IRR, and Payback Period, Furnace Fuel Change emerges as the more favorable investment option. Furnace Fuel Change exhibits superior financial performance across multiple metrics presenting a more compelling investment opportunity. Its higher NPV, ARR, IRR, and shorter payback period collectively underscore its stronger financial performance compared to Air Scrubbers. However, it is imperative to take into account additional factors including environmental ramifications, operational viability, adherence to regulations, and fluctuations in the market landscape when making informed decisions. These aspects contribute significantly to the overall assessment of investment alternatives. Additionally, Aven (2016) asserts that conducting sensitivity analyses to assess various scenarios and risk factors can provide additional insights into the resilience and robustness of each investment option. By carefully weighing these factors and conducting a thorough evaluation, stakeholders can make well-informed decisions aligned with their strategic objectives and risk tolerance levels.
References
Aven, T. (2016). Risk assessment and risk management: Review of recent advances on their foundation. European Journal of Operational Research, 253(1), 1–13. https://doi.org/10.1016/j.ejor.2015.12.023
Boardman, C. M., Reinhart, W. J., & Celec, S. E. (2006). The role of the payback period in the theory and application of duration to capital budgeting. Journal of Business Finance & Accounting, 9(4), 511–522. https://doi.org/10.1111/j.1468-5957.1982.tb01012.x
Magni, C. A. (2010). Average internal rate of return and investment decisions: A new perspective. The Engineering Economist, 55(2), 150–180. https://doi.org/10.1080/00137911003791856
Instructions:
Your Instructor will provide the numerical data of the required investment, annual cash flows, annual net income, average book value, and cost of capital to students. Use that information to calculate the NPV, payback, IRR, and ARR by filling in the highlighted cells. Additionally, use the IRR Worksheet to calculate the IRR using the Excel =IRR formula.
Air Scrubbers
IRR Worksheet
Air Scrubbers
Furnace Fuel Change
Period
Cash Flow
0
Net Present Value using the Annuity Table to determine PV of cash flow
Net Present Value using the Annuity Table to determine PV of cash flow
1
NPV = Initial Cost + (Net Annual Cash Flow × Factor)
Amount
Factor
Present Value
NPV = Initial Cost + (Net Annual Cash Flow × Factor)
Amount
Factor
Present Value
2
Initial investment
1
$ –
Initial investment
1
$ –
3
PV of Annual net cash flow for 15 years
–
PV of Annual net cash flow for 15 years
–
4
Net present value
$ –
Net present value
$ –
5
OR
OR
6
Net Present Value Using Excel to determine PV cash flow
Net Present Value Using Excel to determine PV cash flow
7
NPV = Initial Cost + PV of Cash Flow
Present Value
NPV = Initial Cost + PV of Cash Flow
Present Value
8
Initial investment
Initial investment
9
PV of Annual net cash flow for 15 years
=PV(rate,value1,[value2])
PV of Annual net cash flow for 15 years
=PV(rate,value1,[value2])
10
Net present value
$ –
Net present value
$ –
11
12
Payback Period = Initial Investment / Net Annual Cash Flow
Payback Period = Initial Investment / Net Annual Cash Flow
13
14
15
Internal Rate of Return
Internal Rate of Return
Using Annuity Table
Using Annuity Table
Furnance Fuel Change
OR
OR
IRR Worksheet
Using Excel =IRR(M6:M21) use the IRR worksheet
Using Excel =IRR(M26:M41) use the IRR worksheet
Period
Cash Flow
0
Average Rate of Return = Ave Net Income / Ave Book Value of investment
Average Rate of Return = Ave Net Income / Ave Book Value of investment
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
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