CASE STUDY : 7-3
QUAlLITY METAL SERVCE CENTER
Q1. Is the capital investment proposal described in Exhibit 3 an attractive one for Quality Metal Service Center?
Yes, the purpose of a company is to maximum the profit, and as Elizabeth Barret suggested,it can help company to make more profit. So the capital investment proposal described in Exhibit 3 is an attractive on for QMSC.
Investment in machine $540,000
10 years cash inflow $286,000
PV of cash inflow $39,182
Payback period = 4.5 years
Reasons for selection:
* Positive cash flow
* IRR> COC
* Payback period is less than the standard
Q 2: Should Ken Richards send that proposal to home office for approval?
Ken need send this proposal to home office for approval, because this proposal is good for the company and can make a lot of profit for the company. And another reason is, capital expenditures in excess of $10,000 and all capital leasing decisions require corporate approval.
Q 3: Comment on the general usefulness of ROA as the basis of evaluating district managers performance. Could this performance measure be made more effective?
The Return on Assets (ROA) percentage shows how profitable a company's assets are ingenerating revenue. An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA can be computed as Net Income/ Total Assets. To make it more effective QMSC can use: Multiple performance measure, management service histories, or strategy paining.
Q 4: In deciding the investment base for evaluating managers of investment centers, the general question is: What practices will motivate the district mangers to use their assets most efficiently and to acquire the proper amount and kind of new assets? Presumably, when his redesire that the actions he takes toward this end be actions that are in the best interest of the whole corporation. Given this general line of reasoning, evaluate the way Quality computes the investment base for its districts. For each asset category, discuss whether the basis of measurement used by the company is the best for the purpose of measuring districts return on assets. What are the likely motivational problems that could arise in such a system? What can you recommend to overcome such as functional effects?
Yes, in the investment center. The managers are responsibility for the segments, investment and asset base as well as the profits. Usually, evaluate based on the return on assets employed, evaluation might include a variety of measures such as profit, return on investment, residual income, economical valued added and a range of non-financial measures. Hence the manager in the districts should consider about the acquisition of new equipment, which is an investment for the segment. And also, they evaluated equipment and accounts receivable etc. based on the return on assets employed. May be it can also be the profit center because the managers usually evaluated in terms of effectiveness in raising segment profit level and controlling costs. QMSC should use EVA instead of ROA as the measure of district and manager performance. Since EVA is the best proxy for shareholder value at the business unit level, improving EVA will also improve the companys overall performance. The managers district objectives will then be congruent with the companys overall objectives. This will induce Mr. Richards to employ additional assets which will promote the growth of both the Columbus district and QMSC, such as the one in Ms. Barret’s proposal. The purchase of the new processing equipment is also in line with the company’s objective to develop techniques and marketing program that would increase market share inidentified industries and geographic markets of specialty metal users. Having the equipment will allow QMSC to provide the demand for processed metals in the Columbus District with...
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