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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Orion Group is deciding between two projects. Project A has an NPV of $12m and low risk. Project B has an NPV of $15m, but it would require layoffs and cause local environmental harm that may lead to regulatory fines with an expected present value of $6m. The finance director wants to reflect the interests of shareholders and wider stakeholders. Which recommendation is most consistent with maximising shareholder wealth while accounting for stakeholder impacts?

Choose Project A. Once the expected present value of regulatory fines of $6m is deducted, Project B's NPV falls from $15m to $9m, below Project A's $12m. Stakeholder impacts that cause cash costs to the firm should be reflected in the appraisal.

  1. AChoose Project B, because its headline NPV of $15m is higher
  2. BChoose Project A, because the expected fines reduce Project B's NPV to $9m, below Project A's $12mCorrect
  3. CChoose Project B, because stakeholder impacts are never quantifiable
  4. DChoose neither, because any project affecting employees must be rejected

Explanation

Adjusting Project B for expected fines gives $15m - $6m = $9m, which is below Project A's $12m. Stakeholder costs that feed back to the firm should be included in the cash flows. Choosing B on headline NPV ignores this, and the final two options are unsupported absolutes.

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