Should Finance make The Numbers Come Out?
(Case study derived from the work of Roland L. Madison, CPA published in Strategic Finance.
Amy Kimball is a CPA and a CMA and has an MBA degree from Indiana University. She recently joined ABC Metals and Molding, Inc. (ABC) as a senior finance analyst after spending five years with a large regional CPA firm. Amy received a nice raise to $110,000 per year.
Amy is 37 years old and a single mom with two kids. She shares custody with her husband and no child or spousal support is made in either direction. Both parents share in the kids’ expenses. Amy’s previous job paid $90,000/year and she believes she could find a new position paying between $80,000 and $100,000/year in one year or less.
Amy has house, car, and student loan payments of $2,400 per month. She has no other significant debt obligations. Her share of pre-school costs for the two kids is $800/month. The rest of her $5,200/month take home pay goes for the typical food, gas, utilities and maintenance, clothes, entertainment, etc. Amy has a $12,000 safety net. She also makes $800 monthly pretax contributions to her 401K plan that currently has a balance of $95,000.
Tony Smith is the CFO of ABC (and Amy’s boss). He is a CPA who joined the company two years earlier after being a partner in a national CPA firm. One of ABC’s goals is to expand into international markets. This requires significant travel by the company’s sales and management personnel to Canada, Mexico, and South America. Over the last 10 years, ABC developed a fleet of four corporate aircraft. The fleet is adequate for serving the domestic market but only one of the planes is capable of reaching international target markets. Smith has obtained information on the purchase price of a new medium-sized, long-range corporate executive jet that could easily reach the targeted global markets. He believes that any flight time for this jet not used by ABC could be subleased. He has instructed Amy to perform standard NPV analysis that is required by the Board of Directors of ABC to approve purchases of this magnitude.
After making the necessary inquiries, Kimball made what she thought were reasonable estimates, did the analysis, and gave her report with supporting documents to Smith. The result was a negative NPV. Seeing this, Smith knew that the board would not approve the project. He told Kimball to “recheck her work” because his preliminary estimates showed the result should be a positive net present value. Specifically, Smith told Kimball to increase the estimated salvage value by 50% and the sublease usage rate by 33%. He also told her to see if the economic useful life should be changed from 15 years to 25 years.
Upon receiving these suggestions from Smith, Kimball contacted a representative of the aircraft manufacturer. The representative informed her that the original residual value seemed reasonable the new amount she received from Smith was extremely optimistic. The representative went on to Kimball that while the sublease rate she developed for the aircraft was slightly conservative, the revised rate given by Smith wasn’t reasonable in the current market.
Finally, while it wasn’t unusual for the aircraft in question to be flown for 15, even 20 years before being rebuilt, operating costs typically increase significantly after about 10 years. In other words, if the useful life was assumed to be 25 years, significantly higher operating costs should be assumed after year 10 and a total rebuild of the cabin, engine and avionics would need to occur between years 15 and 20.
After Kimball made the revisions that reflected her conversations with the aircraft representative, the revised NPV was even more negative than previously. When Kimball showed the report to Smith he became very angry that she hadn’t followed his earlier suggestions. He directed her to make the changes exactly as he suggested. He told her to have the revised analysis on his desk by the end of the week so he can take it to the next Board Meeting.
100 to 200-word description of what you would do if you were Amy. Restrict your analysis to how you would handle the situation at work. Don’t discuss changing her home finances situation but you must place yourself in her shoes when you make your recommendation.
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In my opinion, Amy should act in an ethical manner and ensure that the data is not deceptive. She should make full disclosures about the information so that the users of data can use it in the best manner. At the same time, her job is also important. It is suggested that she should conduct scenario NPV analysis in which she should show the NPV of the project using conservative, optimistic and average input values....
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