Discussion

Introduction

Royal Caribbean Cruises invested $1.4 billion to build the Oasis of the Seas,  a cruise ship that carries 5,400 passengers and stands 20 stories above  the sea. The vessel is a third larger than any other cruise ship and  contains 21 pools, 24 restaurants, 13 retail shops, and 300-foot water  slides.

When considering investment opportunities, managers must make two  types of decisions—screening decisions and preference decisions.  Screening decisions, which come first, pertain to whether or not a  proposed investment is acceptable. Preference decisions come after  screening decisions and attempt to answer the following question: “How  do the remaining investment proposals, all of which have been screened  and provide an acceptable rate of return, rank in terms of preference?  That is, which one(s) would be best for the company to accept?”

Sometimes preference decisions are called rationing decisions, or  ranking decisions. Limited investment funds must be rationed among many  competing alternatives. Hence, the alternatives must be ranked. Either  the internal rate of return method or the net present value method can  be used in making preference decisions. However, as discussed earlier,  if the two methods are in conflict, it is best to use the net present  value method, which is more reliable.  When using the internal rate of  return (IRR) method to rank competing investment projects, the  preference rule is: The higher the internal rate of return, the more desirable the project.

The net present value (NPV) of one project cannot be directly compared  to the NPV of another project unless the initial investments are equal.

After an investment project has been approved and implemented, a post-audit should be conducted. A post-audit  involves checking whether or not expected results are actually  realized. This is a key part of the capital budgeting process because it  helps keep managers honest in their investment proposals. Any tendency  to inflate the benefits or downplay the costs in a proposal should  become evident after a few post-audits have been conducted. The  post-audit also provides an opportunity to reinforce and possibly expand  successful projects and to cut losses on floundering projects.

The same capital budgeting method should be used in the post-audit as  was used in the original approval process. That is, if a project was  approved on the basis of a NPV analysis, then the same procedure should  be used in performing the post-audit. However, the data used in the  post-audit analysis should be actual observed data rather than  estimated data. This gives management an opportunity to make a  side-by-side comparison to see how well the project has succeeded. It  also helps assure that estimated data received on future proposals will  be carefully prepared because the persons submitting the data knows that  their estimates will be compared to actual results in the post-audit  process. Actual results that are far out of line with original estimates  should be carefully reviewed.

Source:  

Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.). Columbus, OH: McGraw-Hill Education.

Question: You’re an operations executive chairing the Projects Committee for  Royal Caribbean Cruise Line.  You’re committee has been tasked with  conducting a post-audit of the Project: Oasis of the Sea.  The  committee is aware that the ship actual performance (financial) has  fallen short of expectations. As Chair of the Projects Committee, you’re  expected to prepare a report that outlines current status of the  investment (project), and then present a plan to improve its performance  in the foreseeable future.  You will want to gather relevant  information (financial, economic, etc.); explore and evaluate  alternatives that will bring the Oasis of the Sea into the  “black”; and document your plan, on behalf of the Projects Committee,  using sound arguments that are well supported, properly vetted, and  logically presented. It is important that management carefully consider  any potential ethical implications associated with their stated  position. If there are any potential ethical concerns associated with  your position, they should be identified and discussed in the final  recommendation.

If you prepared your response in Word, please cut and paste it  directly into the discussion board so that everyone will not need to  first download your response, then open it to read it. There is no  minimum or maximum in terms of the word count; however, the response  should explicitly address all required components of this discussion  assignment. The document should be prepared consistent with the APA  writing style (6th edition) and reflect higher level cognitive processing (analysis, synthesis, and or evaluation).