Enager Industries
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Case 22-4 Enager Industries
Why was McNeils new product proposal rejected? Should it have been? Explain.
Target Return
Investment
$1,000,000
1995 Return
Variable Costs (per unit)
$3.00
Hubbards Opinion
12.0%
McNeils Proposal
Price
$8.00
$7.00
$6.00
Units
60,000
75,000
100,000
Revenues
$480,000
$525,000
$600,000
Expenses
Variable Costs
$(180,000)
$(225,000)
$(300,000)
Fixed Costs
$(170,000)
$(170,000)
$(170,000)
$130,000
$130,000
$130,000
Tax (40%)
$(52,000)
$(52,000)
$(52,000)
Income (after Tax)
$78,000
$78,000
$78,000
Return on Investment
Residual Income
WACC – 9.3%
$37,000
$37,000
$37,000
WACC – 12%
$10,000
$10,000
$10,000
WACC – 15%
$(20,000)
$(20,000)
$(20,000)
Economic Value Added (EVA)
$17,550
$21,735
$28,710
12.0%
$-
$5,400
$14,400
13.0%
$(6,500)
$(650)
$9,100
15.0%
$(19,500)
$(12,750)
$(1,500)
McNeils proposal was rejected because it did not meet the 15% return as put forth by Hubbard. While the 15% return was deemed as the required number for proposed projects to be approved upon, Hubbard states that a company like Enager should have a 12% return on EBIT. McNeils proposal demonstrates a return of 13%, and favorable residual income at any point under the 13% WACC. If cost of capital can be held under 13%, then McNeils proposal is a money maker for the Enager.
Evaluate the manner in which Randall and Hubbard have implemented their investment center concept. What pitfalls did they apparently not anticipate?
By definition, the investment center