Quality Metal Service Center

Topics: Investment, Net present value, Depreciation Pages: 3 (975 words) Published: April 29, 2012
Case 7-3
Quality Metal Service Center
1. Is the capital investment proposal described in Exhibit 3 and attractive one for Quality Metal Service Center? The project evaluation seems to be beneficial to the company: A. Payback period: 4.5 years less than the company’s criterion of 10 years B. Internal rate of return: 21.8%

c. Net present value (at 15% cost of capital): $286,000
The proposal seems to be an attractive one due to the fact that there seems to be a need in the district for this particular district to have the ability to perform some preproduction processing which is beneficial to local customers. The investment seems to be within company parameters and sounds attractive. 2. Should Ken Richards sent that proposal to home office for approval? Basing Ken’s decision on his incentive bonus, I would think that he would toss the proposal in the trash. But if he looks into it further he may see an alternate decision. Exhibit 5 only reflects marginal effects of project implementation-that is, an addition of earnings before taxes of $40,000 and an addition to assets of $720,000. Otherwise, the Exhibit assumes that other district operations meet targets exactly in 1992. I would hope that Ken could be a little more visionary and maybe research how much the customers in his district needs them to have this capability and this may impact the increase in sales. Also another option, since it is the sales department requesting this option, put some pressure on them to sell inventory that has been altered through preproduction processing and again this should increase the ability to make more on the bottom line. It does no good to get a piece of equipment that should increase customers orders if the customer is unaware that you now have this new ability. 3. Comment on the general usefulness of ROA as the basis of evaluating district managers’ performance. Could this performance measure be made more effective? Strengths:

* The amount of return...
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