The Point Land Deal Essay

2209 Words Aug 15th, 2014 9 Pages
Background:
RBH builds single-family and higher-density homes, such as townhouses and condominiums.
RBH often had to make significant price concessions and construction costs were continuing to rise.
The stock price had declined almost 50% from the all-time peak in 2005.
Because the homebuilding started slowdown in early 2006, so finances were expected to be much tighter in 2007.
Harry, the president resisted the idea of downsizing of the division in 2007 and wanted to keep employee team intact.
RBH spends considerable effort in preparing formal land acquisition proposal, which examines the proposed building project from housing development type, construction challenges and costs, marketing prospects, and environmental concern.
The
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The issue with it remains is that the project has a IRR of 21 and for a project like this Michael Borland and his division has calculated a required IRR of 24.5.

Issue Prioritization:

Both issue seem to be equally important, however it seems that IRR issue should be attempted to be resolved first: if the required IRR can be lowered without making the forecast too optimistic, Harry will not need to solve this difficult ethical dilemma at this moment.

Alternative Generation:

* Increase IRR * Decrease required IRR (risk) * Don’t’ change
Ethical Problem: 1. Harry submits the forecast as planned.
Consequences: project will be rejected and the division will be downsized

2. Harry makes the forecast more optimistic.
Consequences: Project gets funded and employee layoff could be averted. RBH would lose credibility with joint venture partner if the project earns less than the forecast. And some problems in ethical position.

Evaluation of Alternatives:

Way to increase IRR/decrease required IRR:
[As Harry directly supervises the executives and the issue is about financial returns, the results control is the most appropriate for this issue.] 1) Let VPs know about the problem and the fact that this project is critical for the continuity of the division as is. VPs are: Operations, Sales and Marketing, Land Development, Land Acquisition, and Accounting. This

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