Case Study : 7-3 Quality Metal Servce Center Essay

1166 Words Oct 31st, 2012 5 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
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What can you recommend to overcome such dysfunctionaleffects?

Yes, in the investment center. The managers are responsibility for the segments,investmentand asset base as well as the profits. Usually, evaluate based on the return on assetsemployed, evaluation might include a variety of measures such as profit, return oninvestment, residual income, economical valued added and a range of non-financialmeasures. Hence the manager in the districts should consider about the acquisition of newequipment which is an investment for the segment. And also, they evaluated equipments andaccounts 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 raisingsegment 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

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