Mrc, Inc. (a)
MRC, Inc. is a Cleveland based manufacturing company specialized in power brake systems for trucks, buses, and automobiles; industrial furnaces and heat treating equipment; and automobile, truck and bus frames. As till 1957 most of MRC's sales were made to less than a dozen large companies in the automotive industry, it was exposed to the risk inherent in selling to a few customers in a very cyclical and competitive market. To minimize the risk and to explore new business opportunity MRC's management decided to diversify their business operation. After their fifth successful acquisition, the CEO of MRC Archibald Brinton faced with a dilemma of whether to buy American Rayon, Inc.
Topics which are covered in this case are:
in short capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. In our case Acquisition of ARI was a major capital budgeting decision for the MRC management.
Many formal methods are used in capital budgeting, including the techniques such as • Accounting rate of return • Net present value • Profitability index • Internal rate of return • Modified internal rate of return • Equivalent annuity
Here in our case, we have used Net Present Value or NPV, which is estimating the size and timing of all the incremental cash flows from the project. These future cash flows are then discounted to determine their present value. These present values are then summed, to get the NPV. The NPV decision rule is to accept all positive NPV projects in an unconstrained environment, or if projects are mutually exclusive, accept the one with the highest NPV.
Diversification is a form of corporate strategy for a company. It seeks to