You are a new cost accountant for EAON Corp. Your first project is a capital inv
ID: 2425884 • Letter: Y
Question
You are a new cost accountant for EAON Corp. Your first project is a capital investment proposal to purchase state of the art hardware and software for engineering's new product. The VP of engineering is excited to begin R & D on this new product. He has made it clear to you that he believes in this product and wants your proposal to be approved "with no questions asked".
You prepare your analysis using the company's cost of capital and timeline developed by the VP of engineering. When you dig deeper into the cash flow estimates you can see much latitude has been used in predicting the cash inflows. The VP of engineering has estimated the return on investment and believes a lower discount rate should be used in the PV calculations. You are following company protocol by using the cost of capital as the discount rate.
1. According to the IMA's Standards of Ethical Conduct, what are your responsibilities in this case?
2. Since this is a R&D project, could you justify using a lower discount rate?
3. What will you say to the VP of engineering?
4. Will you stick by your original estimates or make the changes so the VP of engineering can get started on his project?
Explanation / Answer
Answer: 1
According to the IMA's Standards of Ethical Conduct, i will perform the following functions:
Answer:2
Since this is R&D project, using lower discount rates might be appropriate to give positive PV. But more useful would be using appropriate discount rates in order to ascertain the most precise worth of the project.
Answer:3
I will tell VP of engineering that he should not turn the way to his route. Using lower rates might give positive results but that is not appropriate way to estimate.
Answer:4
I will stick to my original estimates because they are more rational.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.