a) As the consultant, I would expect a return of not less than 5%, having taken funds from a business which returns or earnings are 4% to invest in a new project.
Since the capital for investment has originated from different sources, each of the latter represents a different opportunity cost. To evaluate the investment decision, I would use independent projects method, due to which Anheuser-Busch will be an independent entity so that it does not collide with other businesses, concerning capital and maintenance (Pergler & Rasmussen, 2014). The main advantage of this method is that in every period, the cash flow is discounted by another period of capital cost. However, its major disadvantage is that the cost of running the firm requires guesswork.
b) To evaluate the performance of capital projects, managers need to compare it with a suitable benchmark by analyzing the project's Dow Jones Industrial Average, S&P 500, competitor funds, and Russell 2000 index (Pergler & Rasmussen, 2014).
Businesses investing in mutual funds can use the Lipper Indexes made up of thirty largest mutual funds in a particular category, while international investors can make use of the MSCI Indexes. To hold managers accountable for spending overruns, it is important to determine their personal interests such as their bonuses and compensations in order to ensure that they are more careful about capital budgeting and finances since the results will be reflected in their personal interests (Pergler & Rasmussen, 2014). Capital projects should be abandoned when they are not realistic, for instance, they do not present an attractive return.
Internal Control Environment
a) Senior managers at Microsoft created fictitious reserves and implemented them without proper documentation to back the resources, contrary to the management's responsibility.
Various deficiencies existed in the company's internal control system. The company maintained undisclosed reserves, allowances, accrual, as well as liability accounts, which did not conform to GAAP. Additionally, the reserves did not have well documented support as well as substantiation that, as Schwartz, Dunfee, & Kline (2005) note, are stipulated by the federal security laws. Documentation and reconciliations are the major types of internal controls that could have been put in place to detect Microsoft's accounting irregularities. For instance, the ledger accounts were not being reconciled regularly and were not documented appropriately.
b) Senior management should set the tone at the top for integrity and honesty since doing so will help communicate their commitment to ethical behavior, and will consequently encourage employees to behave in the same manner, hence enabling the company to succeed.
If management fails to establish a code of ethics, employees will be more likely to commit fraud and uphold a feeling that ethical conduct is not a priority (Schwartz, Dunfee, & Kline, 2005). This position will in turn impact negatively on the control of environment since employees will emulate the examples of the senior management, leading to business failure, such as in the case of Microsoft.
References
Pergler, M., " Rasmussen, A. (2014). Making better decisions about the risks of capital projects. McKinsey Insights " Publications.
Schwartz, M. S., Dunfee, T. W., " Kline, M. J. (2005). Tone at the top: An ethics code for directors?. Journal of Business Ethics, 58(1-3), 79.
