Case 22-4
ACG 6425 Case 22-4
Abstract
Enager Industries, Inc.
1. McNeil’s new product proposal was rejected because the project was projected to make a return (using ROA - $130,000 EBIT sales and total projected asset investment of $1,000,000) of 13%. While this exceeds Hubbard’s original goal for each division of earning a 12% return on assets, it does not meet the 15% goal set by Hubbard for all new investments.
According to CNN Money, the industry average ROA for Household and Personal Products is 9.6%. If an analyst were to consider Enager’s Consumer Products Division a Specialty Retailer, this number would drop even lower to 6.4%1 Using the standard Hurdle Rate of 12%, and ignoring all other factors, McNeil’s project is predicted to yield 13% and should have been accepted and approved.
Interestingly, the $0.14/share that the project it projected to contribute after tax is still not enough to cover interest expense related to the company’s borrowing, making the project not necessarily worthwhile, regardless of the return rate.
2. Randall and Hubbard had the right original idea with their investment center concept – each division is almost, if not completely, independent of the others and all three divisions offer radically different products and services. The problem that the division manager of the Industrial Products Division has with the system that he failed to express clearly is that the ROA statistic is generated using book value of assets, which would directly impact ROA.
For example, a company earning $100,000 before income and taxes and with older assets with a book value of $1,000,000 would have a ROA of 10%. If that same company was still earning $100,000 but had newer machinery with a book value of $2,000,000, the ROA would be 5%.
The manager of the Industrial Products Division is taking exception to this because he is being penalized for either a) ensuring his equipment is well cared for and lasts longer, or b) simply being
Abstract
Enager Industries, Inc.
1. McNeil’s new product proposal was rejected because the project was projected to make a return (using ROA - $130,000 EBIT sales and total projected asset investment of $1,000,000) of 13%. While this exceeds Hubbard’s original goal for each division of earning a 12% return on assets, it does not meet the 15% goal set by Hubbard for all new investments.
According to CNN Money, the industry average ROA for Household and Personal Products is 9.6%. If an analyst were to consider Enager’s Consumer Products Division a Specialty Retailer, this number would drop even lower to 6.4%1 Using the standard Hurdle Rate of 12%, and ignoring all other factors, McNeil’s project is predicted to yield 13% and should have been accepted and approved.
Interestingly, the $0.14/share that the project it projected to contribute after tax is still not enough to cover interest expense related to the company’s borrowing, making the project not necessarily worthwhile, regardless of the return rate.
2. Randall and Hubbard had the right original idea with their investment center concept – each division is almost, if not completely, independent of the others and all three divisions offer radically different products and services. The problem that the division manager of the Industrial Products Division has with the system that he failed to express clearly is that the ROA statistic is generated using book value of assets, which would directly impact ROA.
For example, a company earning $100,000 before income and taxes and with older assets with a book value of $1,000,000 would have a ROA of 10%. If that same company was still earning $100,000 but had newer machinery with a book value of $2,000,000, the ROA would be 5%.
The manager of the Industrial Products Division is taking exception to this because he is being penalized for either a) ensuring his equipment is well cared for and lasts longer, or b) simply being