Essay about Quality Metal Service Center

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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
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* As a percentage-return measure, ROA is comparable to cost-of-capital and market rate of return measures.
Weaknesses:

* There is no incentive for a division to expand to the point where the marginal return on investment equals the cost of capital.
Since by evaluating on ROA alone could be fine in the short run, but a manager does not have incentive to grow a business by purchasing more assets. Maybe instead of basing the performance evaluation solely on ROA also base the performance on the growth of the district as well and how the district manager contributed to the growth.
4.In deciding the investment base for evaluating managers of investment centers, the general question is: What practices will motivate that district managers to use their assets most efficiently and to acquire the proper amount and kind of new assets? Presumably, when his ROA is being measured, the district manager will try to increase his ROA, and we desire that the actions he takes toward this end be actions that are in the vest 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’ ROA. What are the likely motivational problems that could arise in such a system? What can you recommend to overcome
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