Overcoming Degree Bias in Capital Budgeting: A Case Study of Albany Building Supplies

Overcoming Degree Bias in Capital Budgeting: A Case Study of Albany Building Supplies

The Challenge: Emily Jones, a recent graduate with a BBS from Massey University, joins Albany Building Supplies (ABS), a timber company, eager to apply her financial knowledge. However, she encounters skepticism from her manager, Thomas Wilson, who openly admits his bias against degree holders, believing they lack practical experience.

The Opportunity: Despite his reservations, Wilson values Jones' communication skills and assigns her a crucial task: evaluate two new plywood presses and 'critique' the company's capital budgeting policies.

The Existing System: Wilson relies on a blend of intuition and simple financial metrics. Small investments are evaluated using the payback method, targeting a maximum of 2-3 years. Larger investments, like the plywood presses, undergo payback analysis and the average accounting rate of return (AARR) calculation. Wilson seeks a minimum 20% AARR, mirroring his performance benchmark for plant managers.

The Flaws: Jones recognizes the limitations of Wilson's approach. The lack of discounted cash flow (DCF) analysis, such as net present value (NPV), raises concerns about accurately capturing the time value of money. Additionally, the 20% AARR target, while seemingly high, reflects a book return, not a market-based rate.

The Potential Solution: Jones sees an opportunity to introduce DCF techniques while acknowledging Wilson's preference for a 15% market return. Through clear justification and explanation, she can demonstrate the value of NPV analysis in evaluating the plywood presses and potentially influence a shift towards more sophisticated capital budgeting practices within ABS.

The Case Study: This scenario presents a rich opportunity to analyze:

• Financial Analysis Techniques: Compare and contrast the payback method, AARR, and NPV, highlighting their strengths and weaknesses in investment appraisal.* Degree Bias in the Workplace: Examine the prevalence and impact of bias against degree-educated employees, exploring strategies for overcoming such perceptions.* Effective Communication in Business: Discuss the importance of clear and persuasive communication when presenting complex financial information to a skeptical audience.* The Role of Market Returns: Explain the significance of using market-based discount rates in DCF analysis to ensure accurate project valuation.

By tackling these themes, this case study provides valuable insights into navigating the challenges of implementing theoretical knowledge within a practical business environment.