Enager Industries

Case 22-4 Enager Industries

1) Why was McNeil's new product proposal rejected? Should it have been? Explain.

Target Return 15% Investment $1,000,000

1995 Return 9.3% Variable Costs (per unit) $3.00

Hubbard's Opinion 12.0%

McNeil's 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)

EBIT $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

ROI 13% 13% 13%

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)

9.3% $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. McNeil's 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 McNeil's proposal is a money maker for the Enager.

2) 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