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The Numbers Say this is a Good Investment – Right?
Olive Earle is the assistant to the financial manager at Cyberchamp Inc., a company that
develops software to drive network communications for personal computers. Olive joined
Cyberchamp 2 years ago, following her graduation from college. Her primary
responsibility has been to evaluate capital budgeting projects and make investment
recommendations to the board of directors. Olive enjoys her job very much; she often
finds herself challenged with interesting tasks, and she is paid extremely well.
Last week Olive started evaluating the capital projects that have been proposed for
investment this year. One proposal calls for Cyberchamp to purchase NetWave Solutions,
a company that manufactures circuit boards called network cards, which are required to
achieve communication connectivity between personal computers. Cyberchamp packages
network cards with the software that it sells, but it currently purchases those circuit
boards from another manufacturer. The proposal, which was submitted by Nadine
Kowkabany, Cyberchamp’s CEO, suggests that the company might reduce costs and
increase profit margins by producing the network cards in-house.
Olive barely had time to scan the proposal when she was summoned to Mrs.
Kowkabany’s office. The meeting was short and to the point. Mrs. Kowkabany instructed
Olive to “make the numbers for NetWave Solutions look good because we want to buy
that company.” She also gave Olive an evaluation of NetWave completed two years ago
by an independent appraiser that suggests NetWave might not be worth the amount that
Cyberchamp is willing to pay. Mrs. Kowkabany instructed Olive to find a way to rebut
the findings of the report.
Olive was troubled by the meeting. Her gut feeling was that something was wrong, but
she hadn’t yet had time to carefully examine the proposal. In fact, her evaluation was
very cursory, and she was far from making a final decision about the acceptability of the
proposed capital budgeting project. Olive felt she needed much more information before
she could make a final recommendation.
Olive has spent the entire day examining the appraisal report provided by Mrs.
Kowkabany and trying to gather additional information about the proposed investment.
The report contains some background information concerning NetWave’s operations, but
crucial financial data are missing. Further investigation into NetWave Solutions has
produced little information. Olive has discovered that the company’s stock is closely held
by a small group of investors. These investors own numerous businesses and contribute
generously to the local university, which happens to be Mrs. Kowkabany’s alma mater. In
addition, Olive’s secretary has informed her that the gossip around the “water cooler” at
Cyberchamp suggests that Mrs. Kowkabany and the owners of NetWave are old college
buddies, and that she might even have a stake in NetWave.
This morning, Mrs. Kowkabany called Olive and repeated her feelings concerning the
purchase of NetWave. This time she said: “We really want to purchase NetWave. Some
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people might not believe so, but it’s a very good deal. It’s your job to make the numbers
work—that’s why we pay you the big bucks!” As a result of the conversation, Olive has
the impression that her job might be in jeopardy if she doesn’t make the “right” decision.
This added pressure has made Olive very tense.
Make sure your essay addresses the following key questions:
• Is Olive facing an ethical dilemma? Why or why not?
• What should she do? What would you do if you were Olive? Would your
answer change if you knew Mrs. Kowkabany had recently sold much of her
Cyberchamp stock?
• Should rumors and innuendos be considered in the capital budgeting analysis?
Why or why not?
• If Olive was certain her job hinged on this capital budgeting decision, should
she produce the results requested by the CEO? Why or why not?
• What are some other examples of product failures that may (or may not) have
been due to ethical dilemmas?