Enager Industries, Inc. Essay

1557 Words Oct 22nd, 2010 7 Pages
Question 1) Why was McNeil's new product proposal rejected? Should it have been? Explain.
McNeils' proposal was rejected because it did not meet the target return 15%, which was decided by Hubbard. However, the EVA is unfavorable under 15% return. Hubbard also states that a company like Enager should have a 12% return on EBIT. With this being said, McNeil's proposal demonstrates a return of 13% (ROA = EBIT/Assets = $390,000/$3,000,000), and a favorable EVA will be provided under this return figure. If cost of capital can be had for under 13%, then McNeil's proposal is a money maker for the Enager. In this case, McNeil’s proposal should not have been rejected.
Additionally, an important goal of a business enterprise is to optimize
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They can benefit from the depreciation of equipments. If they speed up the depreciation, it will have more earning profits. Moreover, in order to improve the efficiency industrial products division may buy some new plant and equipment. This may also affect the replacement cost. Therefore, the problem is that there is no one correct way for caculate fixed asset and depreciation.
Although ROA is widely used in measuring performance, this method still has some disadvantages. The main disadvantage for ROA is that it only concern about short run profit. Because managers may only take the project that have higher return on short term and reject the "profitable" opportunity which may be benefit for the company as a whole. With the current ROA approach Hubbard is taking, managers can not accept the new project which is lower than minimum return of 15%.
The RI has a conceptual advantage to ROI When use investment center to evaluate division's performance because it contributes more to the overall corporate wealt
The calculation of Economic Profit (economic value added):
EBIT-Taxes=Net Operating Profit after Tax (NOPAT)
NOPAT-Capital Charge (Invested Capital x WACC) = EVA
The economic value added (EVA) is also known as ecnomic profit which is modified from residual income. Generally, it helps managers clarify how they create value. For Enager's, EVA is the most applicable approach, EVA allows all of the

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