Case Study : 7-3 Quality Metal Servce Center
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
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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The purchase of the new processing equipment is also in line with the company’s objective to develop techniques and marketing program that would increase market share inidentified industries and geographic markets of specialty metal users. Having the equipmentwill allow QMSC to provide the demand for processed metals in the Columbus District witha short lead time, addressing the concern of potential customers. Another aspect of the issue that needs to be looked into is the decision on what assets should be included in the investment base and what expenses should be charged from profits. QMSCincludes 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 annuitydepreciation 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 leaserather own assets whenever the interest charge that is built into the rental cost is less than thecapital 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 towindow dress their performance. QMSC also includes inventory and accounts receivables,without subtracting standard accounts payable, using average values for