Net present value, ethics $($adapted from Roland L$.$ Madison, $$Should Finance Make the Numbers $$Come Out$,$ Strategic Finance, $86,$ no$.10($April $2005)$: $1718.)$ Amy Kimbell, CPA, CMA, and a member of the Institute of Management Accountants, recently joined Magee Metals and Moldings as a senior financial analyst. One of her major responsibilities is to prepare data to support capital equipment purchases.

Magee is trying to expand its international operations. The company is currently spending $$275,000$ each year on international travel, an amount that is expected to increase by $20\%$ each year for the next four years and then level off. Since none of Magee$$s current fleet of corporate jets has the range to fly internationally, Magee$$s CFO, Tony Smith, recently asked Amy to run some numbers on the purchase of a new corporate jet with an international range.

Amy determined that the jet upper managers want to buy has a purchase price of $$15$ million and a useful life of $15$ years. Variable operating costs are an estimated $$220,000$ per year, based on a projected usage of $400$ hours per year. Fixed operating costs are estimated at $$375,000$ per year, not including depreciation. When Magee employees aren$$t using the company$$s jets, they are rented to other parties at a rate of $$3,500$ per hour. Based on existing rental requests, Amy estimated that the new jet would be rented for $500$ hours each year.

Using Magee$$s $12\%$ discount rate, Amy calculated the net present value of the new jet purchase to be at most $($$$6,000,000).$ She knew there was no way the capital budget committee would approve a purchase with such a large negative net present value. When she presented her analysis to Tony, he responded. $$Go back and check your work. When I ran the preliminary numbers, I found a positive net present value. You must have made a mistake.$$ Tony suggested that she increase the useful life of the jet to $25$ years, raise the salvage value by $25\%,$ and increase the rental usage by $50\%.$

Amy did some additional research and determined through discussions with the jet$$s manufacturer that her original salvage value and estimated life were aggressive, but realistic. In fact, if the jet were used for $25$ years, it would require a multimillion$-$dollar overhaul in year $15$ to remain flightworthy. Beginning in year $11,$ operating costs would increase by $30\%.$ With this new information, Amy reworked her analysis and obtained an even larger negative net present value.

When Tony saw the revised numbers, he blew up$.$I told you what to do with the numbers and you did something else. Now go back and do what I said. And have the correct analysis back to me by the end of the day.$$

Amy returned to her office slowly, thinking about what Tony was telling her to do$.$ She had been at Magee for only a month and really liked her job. In fact, she was looking forward to a long career at Magee.

a$.$ Should Amy make the changes Tony has requested, noting in her analysis that the CFO provided t