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Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The company’s CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.)

The project has an anticipated economic life of 4 years.

The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of $1.6 million. The machine will be depreciated on a straight-line basis over 5 years (that is, the company’s depreciation expense will be $320,000 in each of the first four years (t = 1, 2, 3, and 4). The company anticipates that the machine will be sold when the project expires at a salvage value of $400,000.

If the company goes ahead with the proposed product, it will have an effect on the company’s net operating working capital. At the outset, t = 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At t = 4, the net operating working capital will be recovered after the project is completed.

The detergent is expected to generate sales revenue of $1 million the first year (t = 1), $2 million the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue.

The company’s interest expense each year will be $100,000.

The new detergent is expected to reduce the after-tax cash flows of the company’s existing products by $146,000 a year (t = 1, 2, 3, and 4).

The company’s overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the project’s WACC is estimated to be 11 percent.

The company’s tax rate is 30 percent.

*****What is the net present value of the proposed project?

*****The Parker Products’ policy is to recover the cost of this type of project within 3 years. What is the payback period for the project?

*****What should Parker Products do about this project? Accept or reject? Provide arguments for your answer.

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5 Mar 2018

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You worked side by side with Vander for five years, so she knows your abilities will and has complimented your business insights on many occasions. You know that because she only recently been promoted to manager, she needs to build credibility among her peers and will, therefore, be cautious about making a such an important recommendation. On the other hand, making a stellar recommendation for sure an important project would show that she has a good eye for talent- an essential leadership trait.
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Respond to Louis Hapsburg’s email request for a replacement, in which he admitted to inflicting some abuse on this keyboard. Explain, tongue in check, that the company is “rewarding” him with a free keyboard in honor of his massive gaming win, but gently remind him that even the most robust electronic equipment needs to be used with care.
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Let's then assume professional roles as we work on this fictional scenario:

It's 2020, and General Foryota Company opens a plant in which to build a new mass-produced hover-craft. This hover-craft will work using E-85 Ethanol, will travel up to 200 mph, and will reduce pollution worldwide at a rate of 10 percent per year. It is likely that when all automobiles in the industrial world have been changed over to hovercrafts, emission of greenhouse gasses may be so reduced that global warming may end and air quality will become completely refreshed.

However, the downside is that during the transition time, GFC's Hover-Vee (only available in red or black), will most likely put all transportation as we know it in major dissaray. Roadways will no longer be necessary, but new methods of controlling traffic will be required. Further, while the old version of cars are still being used, Hover-vee's will cause accidents, parking issues, and most likely class envy and warfare. The sticker price on the first two models will be about four times that of the average SUV (to about $200,000.) Even so, GFC's marketing futurists have let them know that they will be able to pre-sell their first three years of expected production, with a potential waiting list which will take between 15 and 20 years to fill.

The Chief Engineer of GFC commissions a study on potential liabilities for the Hover-vees. The preliminary result is that Hover-vees will likely kill or maim humans at an increased rate of double to triple over automobile travel because of collisions and crashes at high speeds -- projected annual death rates of 100,000 to 200,000. However, global warming will end, and the environment will flourish.

The U. S. Government gets wind of the plans. Congress begins to discuss the rules on who can own and operate Hover-vees. GFC's stock skyrockets. The Chief Engineer takes the results of the study to the Chief Legal Counsel, and together they agree to bury the study, going forward with the production plans. The Chief Project Manager, who has read the study and agreed to bury it, goes ahead and plans out the project for the company, with target dates and production deadlines.

Our class is a team of young lawyers, project managers, engineers, and congressional aides who are all part of the process of helping get this project off the ground. In fact, according to the first letter of your last name, you are the following team:

A-G: Attorney on the GFC team
H-N: Project Manager on the GFC team
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Somebody sent a secret copy of the report to you at your home address. It has no information in it at all, except for the report showing the proof of the increase in accidents and deaths. The report shows, on its face, that the CLO, CE, CPM, and your Congressional Representative have seen copies of this report. On the front there are these words typed in red: They knew — they buried this. Please save the world!

Each of you feel a very loyal tie to your boss and your company/country. You all have mortgages, and families to feed. It is likely if you blow the whistle on this report, you will lose your job and your livelihood. You're not even sure who wrote the study in your envelope or who actually sent it to you.

Now to the task at hand:
Utilizing your profession's code of ethics, what would be your first step? Who would you talk to first? Would you go to the press? Would you go to your boss? Should you do anything at all?

CASE 2-3: Starnes-Brenner Machine Tool Company: To Bribe or Not to Bribe?

The Starnes-Brenner Machine Tool Company of Iowa City, Iowa, has a small one-man sales offi ce headed by Frank Rothe in Latino, a major Latin American country. Frank has been in Latino for about 10 years and is retiring this year; his replacement is Bill Hunsaker, one of Starnes-Brenner’s top salespeople. Both will be in Latino for about eight months, during which time Frank will show Bill the ropes, introduce him to their principal customers, and, in general, prepare him to take over. Frank has been very successful as a foreign representative in spite of his unique style and, at times, complete refusal to follow company policy when it doesn’t suit him. The company hasn’t really done much about his method of operation, though from time to time he has angered some top company people. As President Jack McCaughey, who retired a couple of years ago, once remarked to a vice president who was complaining about Frank, “If he’s making money—and he is (more than any of the other foreign offi ces)—then leave the guy alone.” When McCaughey retired, the new chief immediately instituted organizational changes that gave more emphasis to the overseas operations, moving the company toward a truly worldwide operation into which a loner like Frank would probably not fi t. In fact, one of the key reasons for selecting Bill as Frank’s replacement, besides Bill’s record as a top salesperson, is Bill’s capacity to be an organization man. He understands the need for coordination among operations and will cooperate with the home offi ce so that the Latino offi ce can be expanded and brought into the mainstream. The company knows there is much to be learned from Frank, and Bill’s job is to learn everything possible. The company certainly doesn’t want to continue some of Frank’s practices, but much of his knowledge is vital for continued, smooth operation. Today, Starnes-Brenner’s foreign sales account for about 25 percent of the company’s total profi ts, compared with about 5 percent only 10 years ago. The company is actually changing character, from being principally an exporter, without any real concern for continuous foreign market representation, to having worldwide operations, where the foreign divisions are part of the total effort rather than a stepchild operation. In fact, Latino is one of the last operational divisions to be assimilated into the new organization. Rather than try to change Frank, the company has been waiting for him to retire before making any signifi cant adjustments in its Latino operations. Bill Hunsaker is 36 years old, with a wife and three children; he is a very good salesperson and administrator, though he has had no foreign experience. He has the reputation of being fair, honest, and a straight shooter. Some back at the home offi ce see his assignment as part of a grooming job for a top position, perhaps eventually the presidency. The Hunsakers are now settled in their new home after having been in Latino for about two weeks. Today is Bill’s fi rst day on the job. When Bill arrived at the offi ce, Frank was on his way to a local factory to inspect some Starnes-Brenner machines that had to have some adjustments made before being acceptable to the Latino. government agency buying them. Bill joined Frank for the plant visit. Later, after the visit, we join the two at lunch. Bill, tasting some chili, remarks, “Boy! This certainly isn’t like the chili we have in America.” “No, it isn’t, and there’s another difference, too. The Latinos are Americans and nothing angers a Latino more than to have a ‘Gringo’ refer to the United States as America as if to say that Latino isn’t part of America also. The Latinos rightly consider their country as part of America (take a look at the map), and people from the United States are North Americans at best. So, for future reference, refer to home either as the United States, States, or North America, but, for gosh sakes, not just America. Not to change the subject, Bill, but could you see that any change had been made in those S-27s from the standard model?” “No, they looked like the standard. Was there something out of whack when they arrived?” “No, I couldn’t see any problem—I suspect this is the best piece of sophisticated bribe taking I’ve come across yet. Most of the time the Latinos are more ‘honest’ about their mordidas than this.” “What’s a mordida ?” Bill asks. “You know, kumshaw , dash , bustarella , mordida ; they are all the same: a little grease to expedite the action. Mordida is the local word for a slight offering or, if you prefer, bribe,” says Frank. Bill quizzically responds, “Do we pay bribes to get sales?” “Oh, it depends on the situation, but it’s certainly something you have to be prepared to deal with.” Boy, what a greenhorn, Frank thinks to himself, as he continues, “Here’s the story. When the S-27s arrived last January, we began uncrating them and right away the jefe engineer (a government offi cial)— jefe , that’s the head man in charge—began extra-careful examination and declared there was a vital defect in the machines; he claimed the machinery would be dangerous and thus unacceptable if it wasn’t corrected. I looked it over but couldn’t see anything wrong, so I agreed to have our staff engineer check all the machines and correct any fl aws that might exist. Well, the jefe said there wasn’t enough time to wait for an engineer to come from the States, that the machines could be adjusted locally, and we could pay him and he would make all the necessary arrangements. So, what do you do? No adjustment his way and there would be an order canceled; and, maybe there was something out of line, those things have been known to happen. But for the life of me, I can’t see that anything had been done since the machines were supposedly fi xed. So, let’s face it, we just paid a bribe, and a pretty darn big bribe at that—about $1,200 per machine. What makes it so aggravating is that that’s the second one I’ve had to pay on this shipment.” “The second?” asks Bill. “Yeah, at the border, when we were transferring the machines to Latino trucks, it was hot and they were moving slow as molasses. It took them over an hour to transfer one machine to a Latino truck and we had ten others to go. It seemed that every time I spoke to the dock boss about speeding things up, they just got slower. Finally, out of desperation, I slipped him a fi stful of pesos. and, sure enough, in the next three hours they had the whole thing loaded. Just one of the local customs of doing business. Generally, though, it comes at the lower level where wages don’t cover living expenses too well.” There is a pause, and Bill asks, “What does that do to our profi ts?” “Runs them down, of course, but I look at it as just one of the many costs of doing business—I do my best not to pay, but when I have to, I do.” Hesitantly, Bill replies, “I don’t like it, Frank. We’ve got good products, they’re priced right, we give good service, and keep plenty of spare parts in the country, so why should we have to pay bribes? It’s just no way to do business. You’ve already had to pay two bribes on one shipment; if you keep it up, the word’s going to get around and you’ll be paying at every level. Then all the profi t goes out the window—you know, once you start, where do you stop? Besides that, where do we stand legally? The Foreign Bribery Act makes paying bribes like you’ve just paid illegal. I’d say the best policy is to never start: You might lose a few sales, but let it be known that there are no bribes; we sell the best, service the best at fair prices, and that’s all.” “You mean the Foreign Corrupt Practices Act, don’t you?” Frank asks, and continues, in an I’m-not-really-so-out-of-touch tone of voice, “Haven’t some of the provisions of the Foreign Corrupt Practices Act been softened somewhat?” “Yes, you’re right, the provisions on paying a mordida or grease have been softened, but paying the government offi cial is still illegal, softening or not,” replies Bill. Oh boy! Frank thinks to himself as he replies, “Look, what I did was just peanuts as far as the Foreign Corrupt Practices Act goes. The people we pay off are small, and, granted we give good service, but we’ve only been doing it for the last year or so. Before that I never knew when I was going to have equipment to sell. In fact, we only had products when there were surpluses stateside. I had to pay the right people to get sales, and besides, you’re not back in the States any longer. Things are just done different here. You follow that policy and I guarantee that you’ll have fewer sales because our competitors from Germany, Italy, and Japan will pay. Look, Bill, everybody does it here; it’s a way of life, and the costs are generally refl ected in the markup and overhead. There is even a code of behavior involved. We’re not actually encouraging it to spread, just perpetuating an accepted way of doing business.” Patiently and slightly condescendingly, Bill replies, “I know, Frank, but wrong is wrong and we want to operate differently now. We hope to set up an operation here on a continuous basis; we plan to operate in Latino just like we do in the United States. Really expand our operation and make a long-range market commitment, grow with the country! And one of the fi rst things we must avoid is unethical . . .” Frank interrupts, “But really, is it unethical? Everybody does it, the Latinos even pay mordidas to other Latinos; it’s a fact of life— is it really unethical? I think that the circumstances that exist in a country justify and dictate the behavior. Remember, man, ‘When in Rome, do as the Romans do.’” Almost shouting, Bill blurts out, “I can’t buy that. We know that our management practices and relationships are our strongest point. Really, all we have to differentiate us from the rest of our competition, Latino and others, is that we are better managed and, as far as I’m concerned, graft and other unethical behavior have got to be cut out to create a healthy industry. In the long run, it should strengthen our position. We can’t build our future on illegal and unethical practices.” Frank angrily replies, “Look, it’s done in the States all the time. What about the big dinners, drinks, and all the other hanky-panky that goes on? Not to mention PACs’ [Political Action Committee] payments to congressmen, and all those high speaking fees certain congressmen get from special interests. How many congressmen have gone to jail or lost reelection on those kinds of things? What is that, if it isn’t mordida the North American way? The only difference is that instead of cash only, in the United States we pay in merchandise and cash.” “That’s really not the same and you know it. Besides, we certainly get a lot of business transacted during those dinners even if we are paying the bill.” “Bull. The only difference is that here bribes go on in the open; they don’t hide it or dress it in foolish ritual that fools no one. It goes on in the United States and everyone denies the existence of it. That’s all the difference—in the United States we’re just more hypocritical about it all.” “Look,” Frank continues, almost shouting, “we are getting off on the wrong foot and we’ve got eight months to work together. Just keep your eyes and mind open and let’s talk about it again in a couple of months when you’ve seen how the whole country operates; perhaps then you won’t be so quick to judge it absolutely wrong.” Frank, lowering his voice, says thoughtfully, “I know it’s hard to take; probably the most disturbing problem in underdeveloped countries is the matter of graft. And, frankly, we don’t do much advance preparation so we can deal fi rmly with it. It bothered me at fi rst; but then I fi gured it makes its economic contribution, too, since the payoff is as much a part of the economic process as a payroll. What’s our real economic role, anyway, besides making a profi t, of course? Are we developers of wealth, helping to push the country to greater economic growth, or are we missionaries? Or should we be both? I really don’t know, but I don’t think we can be both simultaneously, and my feeling is that, as the company prospers, as higher salaries are paid, and better standards of living are reached, we’ll see better ethics. Until then, we’ve got to operate or leave, and if you are going to win the opposition over, you’d better join them and change them from within, not fi ght them.” Before Bill could reply, a Latino friend of Frank’s joined them, and they changed the topic of conversation.

QUESTIONS

1. Is what Frank did ethical? By whose ethics—those of Latino or the United States?

2. Are Frank’s two different payments legal under the Foreign Corrupt Practices Act as amended by the Omnibus Trade and Competitiveness Act of 1988?

3. Identify the types of payments made in the case; that is, are they lubrication, extortion, or subornation?

4. Frank seemed to imply that there is a similarity between what he was doing and what happens in the United States. Is there any difference? Explain.

5. Are there any legal differences between the money paid to the dockworkers and the money paid the jefe (government offi cial)? Any ethical differences?

6. Frank’s attitude seems to imply that a foreigner must comply with all local customs, but some would say that one of the contributions made by U.S. fi rms is to change local ways of doing business. Who is right?

7. Should Frank’s behavior have been any different had this not been a government contract?

8. If Frank shouldn’t have paid the bribe, what should he have done, and what might have been the consequences?

9. What are the company interests in this problem?

10. Explain how this may be a good example of the SRC (selfreference criterion) at work.

11. Do you think Bill will make the grade in Latino? Why or why not? What will it take?

12. How can an overseas manager be prepared to face this problem?

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