With no less than 300 words, post an initial reply to the question below by Thursday at 11:55 p.m. Central Time. Then please respond to at least two classmates’ post with a sentence or two about their post by Sunday at 11:55 p.m. CT. In most cases responding to the instructor posts will also count. Please note that you will not see your classmates’ messages until you create your initial post.
Saskatchewan Mining and Steel (SMS) Corporation is evaluating whether it should produce a new synthetic steel that will require billions of dollars to develop. According to Bill Bates, the CEO of SMS, the synthetic steel should boost sales such that the company’s total new income is increased substantially. Mary, who has worked in the capital budgeting area for six years, has been asked to estimate the relevant cash flows that the synthetic steel is expected to generate.
During the past few weeks, Mary has had quite a few conversations with the company’s engineers, its production manager, and its vice president of marketing. With the information she compiled through her conversations with these people and additional information she received from independent sources, Mary put together a rather detailed forecast of the synthetic steel’s relevant cash flows. The final report, which includes only the forecasted cash flows and explanations for the forecasts, was submitted to the chief investment officer yesterday. The report does not include NPV or IRR analysis of the new product because such analyses are conducted by the investment officer.
Today, the investment officer called Mary to tell her that he thought that the forecasts she submitted were incorrect. Mary explained that her forecasts were based on a large amount of information that she had collected and corroborated in combination with analysts’ predictions concerning the potential success of the synthetic steel. As she told the investment officer, her forecasts were based on optimistic growth rates in sales for the synthetic steel during the next 15 years. The investment officer said that he thought the growth of such a revolutionary product could be higher than Mary estimated, so he asked her to reconsider her cash flow estimates. Although she had reviewed the numbers dozens of times and she is convinced her forecasts are reliable, Mary agreed to “go over” the forecasts one more time. Being a team player is important to Mary because she wants to move up the corporate ladder as quickly as possible, and she believes that her rise to the executive suite will be enhanced if she cooperates with her superiors, including the investment officer.
Because she set up her forecast on a spreadsheet, Mary knew it would be easy to change the growth rate of sales to get new cash flow forecasts for the synthetic steel. But Mary didn’t think that growth rates higher than the ones she used in her original forecasts could be achieved, even if the synthetic steel proved to be a huge success. She did, however use the higher growth rates that the investment officer had suggested and generated a new set of forecasted cash flows for the synthetic steel. Even though she is convinced that the new growth rates are likely not attainable, Mary sent her new forecasts to the investment office a little while ago. She figured, “What’s the difference? I don’t make the final decision anyway.”
Do you believe that Mary should have changed her forecasts? What would you have done if you were in Mary’s position?
Shawn Tully, “The (Second) Worst Deal Ever,” Fortune, October 16, 2006, 102-119.
Colin Barr, “Bailout cost: higher than you think”Fortune (online), September 18, 2008, http://archive.fortune.com/2008/09/19/news/paulson.wrong.message.fortune/index.htm
Colin Barr, “Let big banks fail, bailout skeptics say,” Fortune (online), April 21, 2009, http://archive.fortune.com/2009/04/21/news/too.big.fortune/index.htm?postversion=2009042113
Post by Mariscela Jaimes
The situation is rather complicated because of what we stand behind. If I were Mary I would know the numbers I am submitted are accurate to my experience in capital budgeting. But then again it’s my belief, if the Investment Officer believes the numbers should be differently then experience should also take a factor in me feeling comfortable in changing the growth rate.
Mary had a forecast which was detailed in nature due analyst prediction of the success that the new synthetic steel would bring but also so many discussions regarding the product and marketing. I would back my work up by my experience, if anything I would have submitted both forecasts, the original one and then the updated one that the Investment Officer wanted. This way I would have documentation of both, it would only have taken me minutes to update since I had the information in a spreadsheet already.
This situation goes back to ethics, I would stand behind my work as Mary should because after all a professional is able to climb up the corporate ladder because of the work I perform and not just following status quo. Plus there are financial implications to changing the data, and her name will be behind that forecast.
Now the question I have is would I present my forecast or that of the Investment Officer, and I would present my forecast because I can back it up with my findings based on a lot of research I did.
As one of the article states, “In the long run, guess who gets to bear that cost?” (Colin Barr, “Bailout cost: higher than you think”) if companies predict or forecast higher than they can follow through with they are not being truthful and well the profit of the company struggles because of that forecast that the Investment Officer provided. It wouldn’t be on Mary’s reputation as she truly wasn’t the one that provided that forecast. That is the reason I am stating that documenting it and providing 2 forecasts, one which would be Mary’s and the other one the Investment Officer would be smart because it shows her work was correct and true to her.
Colin Barr, “Bailout cost: higher than you think” Fortune (online), September 18, 2008, http://archive.fortune.com/2008/09/19/news/paulson.wrong.message.fortune/index.htm
POst by Clayton Brooks
This situation reminds me of the discussion question last week. Mary has been tasked to figure out the cash flows that this possible new product could potentially create and has been working on it the same way I would work on it. She has made sure that there are no loose ends and has crunched the numbers over and over for weeks to ensure that everything is correct. But she is being asked to change things around that would make the company and their new product a little more appealing to potential investors than Mary’s original forecast stated. It seems as if Mary’s thought process was that she believed she was correct and that the investment officer was pushing to have a more unrealistically higher growth rate number and that her numbers were more realistic, but her wants took precedent over the facts.
The integrity of both Mary and the investment officer comes into play. For the investment officer, he is looking to make the company’s new product look better than it may end up looking which will, in turn, attract the attention from investors which will make it easier for the company to achieve the new, state of the art steel product which will, in turn, boost the net income of the company. Mary’s integrity is questioned because of her motives. She wants to move up in the company, and it seems she is willing to do whatever she feels is necessary to do so. If she is willing to do this to make friends with those in higher positions, then what else might she do to please management.
I would not change the numbers if I were in Mary’s position. If I were confident in my numbers and felt they were correct, I would stick to them. If the investment officer asked me to look them over because they felt some inputs could be higher, I would take another look, but if I could not a way to increase the numbers that the investment officer wanted, I would leave them the same. I am not going to falsify information just to get ahead within a company. I would keep my work honest.