Springfield Essay

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Case 11-4 Enager Industries, Inc. 1. Why was McNeil’s new product proposal rejected? Should it have been? Explain. ROA CALCULATION FOR EACH NEW PRODUCT Product A Product B Unit Sales 100,000 75,000 Unit Price 18 21 Total Sales $1,800,000 $1,575,000 Variable Cost per Unit Variable Costs Fixed Costs Net Income Total Asset Investment Return on Assets 9 900,000 510,000 $390,000 $3,000,000 13.00% 9 675,000 510,000 $390,000 $3,000,000 13.00% Product C 60,000 24 $1,440,000 9 540,000 510,000 $390,000 $3,000,000 13.00% The McNeil’s new product proposal was rejected because it shows a return on assets less than the required by the president of 15%. McNeil’s proposal should have been accepted because: The ROA for the new product is higher than the current ROA for the Consumers Division’s of 10.8% 13% is higher than the current ROA of the company as a whole (9.4%). It is higher than the hypothetical 12% ROA set by Hubbard that covers interest costs of borrowing capital. If EVA is calculated instead, the residual income is positive. EVA = Net Income – (Cost of Capital x Investment) = 390,000 – (12% x 3,000,000) = 30,000 1 2. What inferences do you draw from a cash flow statement for 1993? Is a breakdown by divisions useful? Would a cash flow statement be useful in evaluating performance? If you had one that showed a breakdown by division, how would you use it?". A cash flow statement helps to evaluate performance because: It determines the ability of the company and each division to generate cash flows from operations. “Cash is king” for some analysts. We could see how is the cash for investments being allocated. How is the company financing their new capital expenditures, stocks or debt. A breakdown by division is very useful because: An analysis of the performance of each division is possible. Cash generated by division is a better metric of operational

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