Capital Budgeting and Business Ethics - Essay Example

CAPITAL BUDGETING Case study of capital budgeting and business ethics ……………………………….. College ……………………………. ……….. 1- Obligations of Financial Managers to their shareholders to avoid financial losses… When The fire-retardant pajamas that have hit the market and found greater marketing success in 1970s have been banned by the U.S Consumer Product Safety Commission due to that it contained flame-retardant chemical Tris that has been found to be a carcinogen in children, it experienced major losses of sales and its inventories remained un-sold. Its financial managers have experienced serious issues of how to save the interests of its stakeholders. Capital budgeting, which is the process of selecting long term investments (Mayo, 2007, p. 401), is often one of the most risky functions of the financial mangers due to future contingencies. The above detailed case is an illuminating example for this. The financial management was experiencing difficulty of how to obey governments rule and follow business ethics whereas how to deal with the inventory in a way that is the best interest of the shareholders. Financial management is expected to evaluate a number of factors in making capital investment decisions. They need to estimate how much is the future cash flows of the firm and how it will change if it invests in a project, but more specifically, the management has to evaluate and foresee the uncertainty associated with these future cash flows (Peterson and Fabozzi, 2002, p. 4). In capital budgeting, the financial management is primarily responsible for searching for the best alternatives, just as with zero-base budgeting, so as to avoid any likely risks (Finkler and McHugh, 2008, p. 246). It is thus the fundamental responsibility of the financial managers in capital budgeting to study and assess whether there can be any legal, economical and financial troubles in carrying in the business in the future and to find best alternatives from many options it has. The financial management, especially in order to ensure that they could save the interests of the shareholders, must evaluate the projects even after it has started manufacturing or marketing of the particular products. In the case detailed above - fire-retardant pajamas- the financial management has to evaluate that this can be a risky project due to its contents that are carcinogens, and therefore over-production can result in greater risks. There must be a proper mechanism in the capital budgeting so that it can avoid complaints of individuals that things are not done the way they should be done. When the firm has large inventories left in its warehouse and they become un-sold, the firm experiences capital loss, and it may benefit the firm in a way of tax-shield, but same time, it raises issues of concerns among its shareholders. Both the tangible and intangible assets that a firm has are of significant values especially when a firm faces legal or otherwise issues regarding the sale of its remaining inventories. The case of fire-retardant pajamas shows that there were large inventory and it must be carefully handled in order to avoid likely risks whereas ensuring maintaining the best interests of the shareholders. Dumping has been considered to be an option for the financial management to ensure saving of the shareholders’ interest, but it rather has greater ethical and legal risks associated with it. The firm can depend on only those projects or idea that don’t cause legal or ethical issues within or outside the country. 2- Dumping: Whether ethical or not? When the US Consumer Product Safety Commission has banned the sale of fire-retardant pajamas, there were major concerns from the part of small, medium and large sized businesses, due to their loss and difficulties in handling of the remaining inventories. Some advertisements in magazines and journals saying that there are people ready to buy Tris and about their intention to buy any large quantities of garments containing Tris, which has been proved to be dangerous carcinogen in children. These advertisements were aimed at dumping this carcinogenic pajamas in international markets. This is severely an ethical and moral issue as it is an already banned product in the US due to its severe danger to children and when it is marketed in overseas the effect will be same. This case is not ethical and is not good business practice because it is more likely to cause severe dangers on human health and human welfare. Any business practice that has adverse impact on human health is considered to be unethical. Business ethics is an inquiry in to the nature and grounds of morality, which means moral judgments, rules of conduct and acceptable standards (Ferrell, Fraedrich and Ferrell, 2009, p. 6). One of the main elements and a very significant dimension of ethical practices in business is identifying what is right and what is wrong. If a particular business practice is not acceptable according to the social standards and moral judgments, it is wrong and therefore unethical too. High ethical standards require businesses and individuals to conform to sound moral principles. From the view of identifying right and wrong, it is quite natural to question whether law and ethics differ in any terms. Law is also about right and wrong, but, there is considerable overlap between them as law is institutionalization or codification of ethics in to specific rules and regulations (Crane and Matten, 2007, p. 5). Delivering the Tris contained pajamas in to other countries might not be against the Law then prevailing in the US, but certainly against the business ethics. Even though it was argued that people involved in the dumping have been informed about the severity of dangers of the carcinogens in the pajamas and those people wouldn’t have otherwise access to such pajamas and therefore it can be justified, the unethical side is still obvious that people who were not aware or not well informed are more likely to experiences its risks. In 1971, the Dalkon Shield intrauterine device has been marketed and it has been found that these devices had greater adverse effects on human health. These devices have been found to cause pelvic inflammation, blood poisoning, pregnancies that resulting in spontaneous abortions, tubal pregnancies and uterine perforations etc. these devices had even caused numbers of death cases. The manufacturer of these devices came in to an agreement with US Agency for International Development to market these devices in other 42 countries to use in population-control programs. Even when those for this approval argue that their intention is humanitarian, the non-humanitarian side of this activity is more obvious and clear. No matter whether it is going to be used for good or bad purposes, it side effects on human health cannot be ignored and is therefore extremely unethical. As far as business ethics is concerned, when a particular business practice has positive impacts from the perspectives of the company, these would noticeably impacts negatively on customers or public at large. The same happens in the case of Dalkon Shield which affects human health negatively and cause sever dangers and diseases. As Jennings (2008) noted, depending on other’s or past activities cannot be considered to be a proper reasoning for a business practice. ‘That is the way it’s always been done’, ‘is there a better way to do this’, ‘That is the way everybody was doing’, are not proper ethical analysis (p. 16). The case of Dalkon Shield points out that the manufacturer argued in a way that it was the only effective way to population control in other 42 countries and its manufacturer has been approved for its transportation to other countries. The unethical sides of this has not been considered. References Crane, A and Matten, D (2007), Business ethics: managing corporate citizenship and sustainability in the age of globalization, Illustrated second edition, Oxford University Press Ferrell, O.C, Fraedrich, J. and Ferrell, L (2009), Business Ethics: Ethical Decision Making and Cases, Seventh revised edition, Cengage Learning Finkler, S. A and McHugh, M. L,(2008), Budgeting concepts for nurse managers, Illustrated Fourth edition, Elsevier Health Sciences Jennings, M. M (2008), Business Ethics: Case Studies and Selected Readings, Illustrated sixth edition, Cengage Learning Mayo, H. B (2007), Basic Finance, An Introduction to Financial Institutions, Investments, and Management, Thomson Peterson,P. P and Fabozzi, F.J, (2002), Capital budgeting: theory and practice, Illustrated edition, John Wiley and Sons Read More