CASE STUDY

1841 WordsDec 6, 20148 Pages
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 NPV= 286000 IRR= 2.8% 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…show more content…
QMSC includes land, warehouse buildings, and equipment at gross book value in its investment base. This results to an EVA that signals a decrease in profitability during the early years of the assets when in fact, profits increased. It will be better for the company to use annuity depreciation so that the profitability calculations will show the correct EVA. Leased buildings and equipment are also part of the asset base. This motivates managers to lease rather own assets whenever the interest charge that is built into the rental cost is less than the capital charge that is applied to the investment base. Thus, the head office must think carefully before approving the leases of the districts as the managers might just be using it to window dress their performance. QMSC also includes inventory and accounts receivables, without subtracting standard accounts payable, using average values for the period. This is a good practice because these are representative of the assets used during the period and thus, conceptually a satisfactory measure of the amount that should be related to profits. Q 5: While computing district profits for performance evaluation purposes, should there be a charge for income taxes? Should corporate overheads be allocated to districts? Should profits be computed on the basis of historical costs or on the basis of replacement costs? Evaluate

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