The capital budgeting decision Essay

The capital budgeting decision Essay.

How do we determine if cash flows are relevant to the capital budgeting decision?

Any cash flows that are not incremental are not useful, and also are not used for decision in the capital budgeting. All investments are expected to earn a return that can be evaluated by comparing the future cash outflows and cash inflows. When dealing with capital budgeting decisions, the concept of incremental cash flow is central to the firm’s analysis. The incremental cash flows determine the difference between a firm’s future cash flows with a project and those without a project.

In the context of capital budgeting, what is an opportunity cost? Opportunity cost is defined as the benefit surrendered from a specific decision. When a firm is undertaken an investment, the most valuable alternative that is given up is called an opportunity cost. In the context of capital budgeting, an opportunity cost is the value of an asset that will be used in the project.

The capital budgeting decision Essay

Layoff and Strategic Downsizing Decisions Essay

Layoff and Strategic Downsizing Decisions Essay.


Downsizing is a permanent reduction of workforce through layoffs and other means. Organizations usually downsize to save payroll costs and prevent bankruptcy during tight economic conditions. Downsizing, when done right, makes the organization more efficient, lean, and mean .On the other side, a faulty approach to downsizing can cause the organization to run the risk of losing key talent and intellectual capital, and becoming dysfunctional by breakdown of hierarchies and systems. The criteria adopted for who stays and who goes largely determines the success of the downsizing intervention Many organizations, especially traditional ones, in a bid to ensure impartiality and objectivity adopt the LIFO or “Last in First Out” principle whereby those who joined the organization last become the first to leave.

The rationale of making seniority the basis of downsizing is that newer employees have spent less time in the organization and are less committed or acquainted with the finer nuances of its running.

Also, the organization would have invested lesser time and resources training such employees compared to older employees.

other organizations make the combination of competence and performance, or the ability to do required tasks well, the basis of retaining an employee during downsizing. A fresh performance appraisal should precede downsizing, or the last appraisal can be the basis for determining who goes and who stays. Those at the bottom of the appraisal list usually get the layoff notice first. While making performance the primary selection criteria for downsizing and restructure is apparently a just and equitable method, two major concerns remain The soundness and objectivity of the performance appraisal method adopted. A poorly designed performance appraisal method that does not assess the true indicators of performance might churn up a wrong list, causing the danger of the organization dispensing with true performers and retaining people who cleverly mask or cover up their inefficiencies. Whether the performance or competence ofthe employee remains relevant for the organization.

The expendability of the person to the organization is another sound basis for determining the selection criteria for downsizing and restructure. This approach primarily considers the value added by the employee to the organization more than any other factor. Regardless of the performance of an employee, an employee might remain critical for the functioning of the organization, or conversely not needed. For instance, with technology taking roots, most companies do not require specialist stenographers or typists, no matter how skilled or efficient they may be in their work. Similarly, closing down the marketing arm of the business and outsourcing the marketing effort might lead to the lay-off of all marketing executives, no matter how skilled or successful they may be.

Organizations would, however, do well to identify people with good generic skills, and the right attitude and commitment, and retain them in other jobs even if the jobs they remain competent in become irrelevant to the organization. The commercial interests of the organization notwithstanding, legal considerations play an important role in determining who goes and who stays during downsizing. The federal Worker Adjustment and Retraining Notification Act (WARN) requires employers to give employees, state and local officials a 60 days’ notice to mass layoffs when reducing their workforce by 33 percent or more, or laying off 500 employees within a 30-day period. WARN further requires employers of unionized employees to give the union 60 days’ notice before lay-off of their members, and provide individual notice to non-unionized employees.


Downsizing occurs when a company permanently reduces its workforce. Corporate downsizing is often the result of poor economic conditions and/or the company’s need to cut jobs in order to lower costs or maintain profitability. Downsizing may occur when one company merges with another, a product or service is cut, or the economy falters. Downsizing also occurs when employers want to “streamline” a company – this refers to corporate restructuring in order to increase profit and maximize efficiency. Downsizing results in layoffs that are often followed by other restructuring changes, such as branch closings, departmental consolidation, and other forms of cutting pay expenses. In some cases, employers are not fired, but instead become part-time or temporary workers (to trim costs).


It undertaken to improve organizational efficiency, productivity and competitiveness that affect the size of the firm’s workforce the costs and the work processes.


There are 3 types of strategies. These are below:
1.workforce reduction: redesign
3.systematic change 1. Workforce reduction:
Typically a short term strategy aimed at cutting the number of employees through such programs as attrition, early retirement or voluntary severance packages and layoffs or terminations. Whils a number of these approaches allow for a relatively quick reduction of the workforce, the problem is that their impact is often short term and in many organizations.

2. Work redesign:

Often a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products and services should be changed or eliminated. this strategy which is frequently combined with workforce reduction, includes such things as elimination of functions, groups or divisions.

3. Systematic change:
Long term strategy characterized by changing the organizations culture and the attitudes and values of employees with the ongoing goal of deducting costs and enhancing quality. By its very nature this strategy takes considerable time to implement.


The issue that comes up regularly involves how common workforce reduction in Canada. In a national study of major Canadian organization conducted in 1992 and in 1998, it was found that 56% of respondents permanently reduce the workforce over two year period ending in 1992, while 50% cut the number of employee during two year period prior to 1997-1998 about 31% of employee reduced in both 1992 and 1998 5% precent of organization did not engage in workforce.

Three recent studies found 45% of participants reported that their organization permanently reduced workforce in two years. Among organizations reducing the workforce average reduction was around 15% of the workforce. Similarly, when investing how the workforce reductions were carried out; combining the result from the studies revealed that about 355 of reductions were by attrition, 45% by voluntary severance or early retirement; and 40% by layoffs. Compared 1990s, these results suggest that organization s are relying less on layouts and more voluntary services.


There are several reasons why organizational decide to downsize the workforce. Some of the factors most commonly mentioned include the following: Declining profits
Business downturn or increased pressure from competitors
Merging with another organization, resulting in duplication of effort Introduction of new technology
The need to reduce operating costs
The desire to decrease levels of management
Getting rid of employee “deadwood”

Simply put, many organizations engage in downsizing because managers believe that cutting people will result in reduced cost (with cost being more predictable than future and improved financial performance. In addition, labour cost is often seen as easier to adjust relative to other expenditures. Although executives often perceive that reducing the number of people in the organization will lead to lower overhead cost, reduced bureaucracy ,better communication, improved decision making, increased innovative activity and higher productivity, there is considerable evidence that workforce reduction programs often fail to meet their objectives, as has been observe by Cascio: Study after study shows that following a downsizing, surviving employees become narrow-minded, self-absorbed, and risk averse.

Morale sink, producing drops, and survivors distrust management. Some organizations drastically reduce the workforce and employ a severe reduction strategy despite increasing demand and a favourable competitive enviroment.This development, which has been mentioned by HR managers in personal interview, may be due to a variety of reasons, including a decision to follow the lead of other firms engage in cutback management and increase awareness of the need of operate in a lean and mean fashion.


For many organizations, going through a downsizing is a very painful and difficult experience. A 1994 article Business week profiled Robert Thrasher, executive vice-president at Nynex and the individual responsible for cutting labelled the “corporate assassin”. In speaking about downsizing Thrasher commented. This is tough, ugly work. The stress is palpable .I’m vilified throughout the company .that’s tough thing to carry around. “More recently, Robert Burtlon of Moore Corporation, when discussing his role in a cost cutting plan at a previous company, stated.” I don’t get frustrated any more. I just fire people.”

Too often, organization embarks on a downsizing program without careful consideration of whether there are feasible alternatives to downsizing. Studies after study reveals that many downsizing are not well planned frequently ignore the linkage between downsizing and the strategic direction of organization, and underestimate the impact of downsizing on the organization and its human resource.


Downsizing can be a costly strategy for organization to pursue and as a result, it is desirable to investigate whether alternatives to downsizing exis.In a number of instance, organizations discover that pursuing different alternatives to downsizing may eliminate the need to reduce the workforce or allow for a less severe downsizing strategy.

Some of the alternatives include:

1. Cutting no personnel costs (e.g, through energy conservation, planned capital expenditures, leasing of capital equipment, reductions in travel or club memberships) 2. Cutting personnel costs (e.g, through a hiring freeze, job sharing, a reduction in work hours, reduced benefits, and wage concessions) 3.Providing incentives for voluntary resignation or early retirement Although this list is not complete, it emphasizes the need to consider other ways to manage costs within an organization One organization, road communications inc, asked each member of its staff to take one week of unpaid leave during the summer months. According to senior partner mia wedgbury , it let us keep our core team together while reducing cost. And it went over well with the staff because it precluded layoffs. another organization acxion corporation cut the pay of each employee earning more than 25000 dollar by 5% but also gave the employee the option to by company stock that would be matched one-foe one by the firm INPLACEORMENT AND OUTPLACEMENT ISSUES:

Outplacement Issues .Inplacement Refers To A Career Management Approach Inappropriately Placed Workers Into a Restructured organization ,while outplacement focuses on the provision of a program In Examining The Downsizing Decision, It Is Necessary To Consider Both Inplacement And of counseling and job-search assistance for workers who have been terminated. In making career management decisions, organizational decision makers may opt for an inplacement program or termination with outplacement In a survey of Canadian manufacturing firms completed in 2000, organizations that had gone through downsizing were asked to report on the benefits they provide to displace workers. These results are provided in figure11.2 .The most common benefits were severance pay, continuation of employee benefits, outplacement retraining assistance or family counseling


If downsizing is essential, the key issues that need to be considered: Determining how many people will lose their job and who will be let go (ie. based on seniority or performance)

Determining how reduction will be carried out. For example, to what extent will the organization use attrition, early retirement or voluntary severance programs and layoff or termination. Its possible to consider the approach to workforce reduction from the perspective of employee? As indicated in figure 11.3,the approaches to workforce reduction vary in the degree of protection to employees and the cost to employee

Determining the legal consequences. For example organizations often ignore or are unaware of legal requirements when downsizing the workforce .some areas of law to be aware of include the law of wrongful dismissal,employment standards legislation, trade union law ,existing collective agreement provisions, and human right legislation. for instance, there may be a very narrow line between voluntary and involuntary termination, and with the termination of older workers, there exists a possibility of an age discrimination claim Designing current and future work plans .this issue represents a key challenge for the organization and is frequently neglected Implementing the decision. Implementation includes such elements as severance payments, outplacement counseling, the communication of the termination decision, timing if the decision, issues, and communications with remaining employees Performing follow-up evaluations and assessment of downsizing effort

Figure 11.3 Approaches To Workforce Reduction

Workforce Degree of Reduction protection to Implementation Approach Example Employee Time Attrition Hiring Freeze High Show

Voluntary Early Retirement Redeployment Voluntary buyout
Work sharing

Involuntary Transfer Redeployment Demotion
Imposed job sharing

Layoff with Retraining
Assistance job counseling Advance notice

Layoff without Termination Low First Assistance No advance notice No Severance

There are 6 processes. These are below:

1. Develop an RIF team to plot initial strategy.
2. Plan the goals and timing of the RIF.
3. Perform an overall workforce analysis.
4. Review employment policies, individual contracts of employment.
5. Ensure compliance with the Worker.
6. Special considerations for unionized employers.

1. Develop an RIF team to plot initial strategy:

Nobody likes the prospect of a downsizing – especially employees who may feel particularly vulnerable to being laid off – and the mere mention of the word can trigger widespread hysteria and morale problems. At the early stages of the initial strategy phase, a company should limit discussion of downsizing to a trusted core of high-level management personnel and consultants. For large companies considering large-scale layoffs, the RIF team ideally should include the chief financial officer, the chief executive officer, the chief operating officer, a senior-level human resources or employee relations executive, an upper-level payroll specialist, an employment law attorney, and a public relations consultant.

2. Plan the goals and timing of the RIF:

The first task is to determine the magnitude of savings that need to be realized from a layoff. This task is part of an overall cost-cutting plan, which could implicate other costs and expenses in addition to those related to personnel. Second, the RIF team should consider ways to realize the desired savings, such as subcontracting; consolidation of divisions, operating units or functions; the sale of the company or a work unit; and shutdowns.

3. Perform an overall workforce analysis and an analysis of each proposed termination:

The most complicated and difficult aspect of the RIF process is determining which employees will be laid off. The most common legal challenges to layoffs are administrative charges and lawsuits premised on discrimination based on age or other legally protected characteristics. Accordingly, it is crucial for an employer to be able to give legitimate, nondiscriminatory reasons for every termination decision. Those reasons need to be easy to articulate and logically consistent.

4. Review employment policies, individual contracts of employment, separation benefits and stock-option agreements under which affected employees may claim rights or benefits:

The RIF team should perform a due-diligence review of potential liabilities and verify whether, by policy or contract, the company has limited its ability to lay off employees. Likewise, where a collective bargaining agreement or policy dictates a priority for reductions in force, or “bumping rights,” such procedures should be examined. The company should also review policies and agreements to determine eligibility for severance benefits and accrued benefits such as paid time off, vacation or sick leave.

5. Ensure compliance with the Worker Adjustment Retraining and Notification (WARN) Act:

Generally, employers with 100 or more employees are subject to the WARN Act. Covered employers are required to give 60 days’ advance written notice of a “plant closing” or “mass layoff.” A “plant closing” is defined as the permanent or temporary shutdown of at least one facility or operating unit that results in an employment loss of 50 or more employees at a single site of employment. A “mass layoff” is a loss of employment at a single site of employment that affects at least 50 employees and one-third of the covered employer’s work force. a loss of employment of 500 or more workers at a single site of employment.

Special considerations for unionized employers:

The National Labor Relations Board maintains that, with certain exceptions, employers must bargain with employee representatives over the effects of layoffs stemming from entrepreneurial decisions such as closing a plant or transferring bargaining-unit work. In the case of layoffs that do not constitute a business closing or a transfer of bargaining-unit work, employers generally must bargain over the effects of such decisions and, depending on contract language, the very decision to lay off employees.


Workers who have lost their jobs frequently experience tremendous pain. As well, job loss can be very difficult for family members. Furthermore, many downsized employees are very bitter and angry with their former employer. A U.S. study of downsized workers revealed that 67% would never work for their former company again, 54% would not recommend that others purchase the organization’s products or services, and 11% considered going to the media and talking about their layoff experiences. One can start adjusting to job loss by using a little psychology. There have been a lot of studies done on how to deal with loss. Psychologists have found that people often have an easier time dealing with loss if they know what feelings they might experience during the “grieving process.” Grief doesn’t usually overwhelm us all at once; it usually is experienced in stages. The stages of loss or grief may include: Shock — you may not be fully aware of what has happened.

Denial usually comes next — you cannot believe that the loss is true. Relief then enters the picture for some, and you feel a burden has lifted and opportunity awaits. Anger often follows — you blame (often without reason) those you think might be responsible, including yourself. Depression may set in some time later, when you realize the reality of the loss. Acceptance is the final stage of the process — you come to terms with the loss and get the energy and desire to move beyond it. The “acceptance” stage is the best place to be when starting a job search, but you might not have the luxury of waiting until this point to begin your search. While some people may see a job loss as a challenge which opens up new opportunities, most associate job loss with strong negative emotions.

It is important to know that it is natural to have some negative feelings (especially at first) after a job loss, and that most people experience them. Here are some feelings and experiences that you may have after losing your job: Loss of professional identity: Professionals identify strongly with their careers. Unemployment can often lead to a loss of self-esteem. Being employed brings respect in the community and in the family. When a job is lost, part of your sense of self may be lost as well. Loss of a network: The loss may be worse when your social life has been strongly linked to the job. Many ongoing “work friendships” are suddenly halted. Old friends and colleagues often don’t call because they feel awkward or don’t know what to say. Many don’t want to be reminded of what could happen to them.

Also, when work and social activities mix, such as with company picnics and dinner parties, the job loss can be hard for all family members who participated in such activities. Emotional unpreparedness: Those who have never been unemployed may not be emotionally prepared for job loss and may be devastated when it happens. It is natural and appropriate to feel this way. You might notice that some people you know don’t take their job loss as hard as you have taken it. They might be more prepared for this time of uncertainty. Studies show that those who change jobs frequently, or who are in occupations prone to cyclic unemployment, suffer far less emotional impact after job loss than those who have been steadily employed and who are unprepared for cutbacks.

A number of organizational interventions and practices have been identified as helping previously employed workers adjust to job loss and secure new employment. They include the following: Advance notification of layoffs, which gives employees time to dent with the reality of job loss and to seek future employment. Severances pay and extended benefits, which provide an economic safety net. Education and retraining programs, which give individuals time to acquire marketable skills. Outplacement assistance to inform employees of new job opportunities and to improve their ability to “market” themselves. Clear, direct and empathetic announcement of layoff decisions. Consideration of HR planning practices that represent alternatives to large scale layoffs.

There are some benefits of losing a job:

Time to reflect
Grow new ideas, direction and career plan
Get out of a job that was substandard
Spend more time with family and hobbies

Layoff and Strategic Downsizing Decisions Essay

Kardell Paper Company Decision Essay

Kardell Paper Company Decision Essay.

The Board of directors of Kardell Paper Company should accept the installation of the new processing technology witch protects the environment by refining the company’s waste water .Implementing this new technology will increase the company’s long- term profitability and reputation by providing enough power and ability to compete and operate efficiently in the future market.

This ethical solution is offered, after analyzing Kardell’s board of directors’ decision to refuse the new technology due to its high turn over costs.

The impacts of this decision on the company’s primary stakeholders is studied carefully by using the 5-question ethical approach. The assessment has been made by comparing the profitability, legality, fairness and rightness of the company’s decision and its impacts on major groups of stakeholders and their interests.


The Kardell Paper Company (KPC) is a publicity traded company with good financial record and a profit of $1.7 million per year.Kardell’s original mill which is not designed with accordance to high environmental protection standards, is located near the Riverside, a community of 22,000 residents (Brooks 371) The local community has been suffering from an unusually high rate of miscarriages and respiratory disorders since 1985.

Therefore,in the same year, a research has been done on the water sample of the river which showed high level of industrial chemical called sonox.Also,it was discovered that the plant lab failed to mention the high sonox level in its monthly report to the managers. However, after informing the CEO and the Board of Direcors, no serious action has been taken to solve this problem and proven the situation. They failed to undertake an appropriate environmental audit and even refused the possible solution of adopting a new technology to refine the company’s waste water.(Brooks 372)

The Issues

In fact, KPC’s board of directors faced two major problems in adopting the new technology. First, the $70 million cost of implementing the new technology which would affect the productivity and profitability of the company. Second, the issue of unemployment and job loss that will occur, as a result of shutting down during the retrofit.

To analyze and asses KPC’s decision, the 5-question framework will be used. This approach requires identifying the company’s most important stakeholders, prioritizing their interests and applying five questions to examine the impacts of the company’s decision on each stakeholders group (Tucker 348).

Identification of Stakeholders and their Interests

According to the Corporate Social Responsibility (CSR), companies are concerned for the well being of the people, society and the environment (Brooks 399). Therefore, identification of all the stakeholders and their concerns are quite important for analyzing companies’ business decisions and ensure their long term success. The most important stakeholder groups that are impacted by KPC’s decision can be recognized and ranked as follow.

Current and Future Shareholders

The impact on this group measures in terms of profit or loss. In this case, current shareholders will face a short-term reduction in the dividend payments due to the high cost of adopting the new processing technology ($70 million) and the probability of capacity level reduction during the retrofit. However, if the decision becomes known, the company may end up paying high clean up and compensation costs as well as Governmental fines.On the other hand, the future shareholders such as ethical investors are more interested in long-term profits and give more value to moral and ethical behavior of the company.

KPC’s Employees and Labor Union

They may potentially get unemployed or receive less salaries and benefits due to the productivity reduction during the retrofit. However, KPC is putting its employees and their family’s life at risk by being the source of harmful emission and keep polluting their environment.Therefore, by refusing to install the new technology, KPC is ensuring the employees’ job and salaries at the expense of ignoring their core human rights such as right to good health.

KPC’s Managements

This group consists of the company’s Executive Officers and other managers who receive generous bonuses and benefits. They seek for short term profit without paying enough attention to the long term consequences of their decision. They have ignored the risks that are involved upon revelation of their decision by whistle blowers such as; possible clean up costs as well as negative reaction of the community by boycotting the company’s products.

Local Community

There is no doubt that KPC has CSR toward the community and therefore must ensure the business continues operating to create wealth and to build good reputation (Brooks 399). As the local community is suffering from the side effects of the high sonox level in the water, KPC has to act responsible ,honest and reliable to solve their problem. On the other hand, the local community might be highly dependant on the company as a main source of income in the area and would severely suffer during the retrofit. But, there is no doubt that saving their lives and living environment should be the company’s first priority.


As the Government wants the health and well being of the society and protect them from harm, it would like KPC to invest in the technology and bring down the number of sick people. Also, this might be to the government benefit as it would reduce the health cost.

As it has explained, KPC’s primary stakeholders consist of different groups with various interests .For being able to asses the impact of the company’s decision, the fundamental interest of the stakeholders should be taken into consideration. The decision should maximize the well-offness of all stakeholders, should result in a fair distribution of benefits and burdens, and also should not offend any of the rights of stakeholders (Brooks 336).

Considering the above mentioned criterias, even though the proposed decision may maximize some current shareholders and managers’ profits, but it is defiantly not fair or profitable for the other employees and the community.Moreover, KPC is offending the core human rights of the residents and its employees by jeopardizing their lives and health. Unquestionably those rights should be the company’s first and principle concerns.

Application of the 5-Question Approach

1- Profitability

There is no doubt that the refusal of installing the new processing technology which cost $70 million and results in shutting down the firm, will be profitable in short term and will also reduce the risk of economic loss.However,the likelihood of the decision becoming public by either whistle blowers or ethical shareholders has to be estimated. In this case, KPC might face serious problems such as; loosing the community support, paying high compensations and clean up costs as well as possible future lawsuits for damaging the environment.Consequently, adopting the new technology will be more cost benefit in long term.Moreover, KPC will be able to offset some costs by reclaiming waste material and sell it to chemical producers (Brooks 372).

2- Legality

The KPC’s decision might not be illegal at the moment as it complies with the existing governmental limits and environmental regulations. But due to high number of miscarriages, birth defects and respiratory aliments in the area, there is no doubt that the government will tighten the standards to limit the sonox emission in near future. Therefore, KPC should make a proactive decision to reduce any chance of probable lawsuits.Also, according to the Golden Rules; KPC managers should treat the community as they want to be treated (Hunt and Cox 22). Also, KPC should give priority to the values such as Integrity, honesty, Responsibility, Predictability and try to apply more ethical principles and ground rules to implement those values.


While the deferment decision may considered fair and profitable for shareholders and managers, it is unfair for majority of stakeholders With regard to CSR ,KPC is not only responsible to make profit for its shareholders but also committed to various stakeholders (Brooks 359).Also, the even distribution of benefits and interests among all stakeholders a should be taken into consideration.If,this unfair treatment becomes public, it may result in severe reaction from the injured parties which will cause business failure.

4- Impact on Rights

As it has described, the proposed decision had negative impact on the rights of several stakeholder groups in terms of life, health, safty and security.KPC has negatively affected the health and well being of the society and its employees by potentially polluting their environment .Therefore, KPC’s decision would be considered unethical. It has failed to respect the stakeholders’ values and preserve their health and safety rights, by not disclosing appropriate information to the public and also not taking the necessary steps to solve its technical problem.

5-Is It Sustainable Development?

From the environmental prospective, KPC has to operate in accordance with high environmental protection standards. In order to prosper and progress in future, the company has to equip itself with the newest technology and skills required to keep the environment safe and sound.

Conclusions and Recommendations

The analysis has shown that, although KPC’s decision to defer the installation of the new processing technology might promise the short term profitability of the company and guarantee the shareholders’ interests and can be within governmental limits at the presents, it is not fair or right to the other stakeholders. Moreover, with regard to the valid probability of the decision revelation as well as the cost -benefit analysis, the long profitability of KPC might be at risk .The company may end up with paying high clean up costs and expenses. Consequently, KPC’s decision is unethical and may result in future public negative reaction and failure.

The above mentioned facts and consequences should be fully taken into consideration by the Board of directors.Therefor,Kardell’s board of directors should act immediately and solve the pollution problem by adopting the new processing technology and accepting the fact that the company’s long term success and productivity depends on this action.

In addition, KPC can resolve the probable job loss and unemployment during the retrofit by providing employees with early retirement packages or even ask the government to assist those employees with the unemployment insurance.

Kardell Paper Company Decision Essay