Majata is a large, long-established, and now widely diversified company mainly manufacturing industrial products in more than ten divisions. Divisional managers are paid a bonus which is largely dependent on the division meeting its budgeted return on investment (ROI) target. One of the divisions in the group is the Forgings Division. The budgeted ROI figure for Pangs in 2003 is 13.2%. The budgeted profit is$10millionandthecapitalemployedis$76million.Anewopportunity for investment has arisen in Pangs and this opportunity was not included in the 2003 budget. Before considering the specific investment opportunity it is worth just briefly looking at some background to the Pangs Division. Traditionally, the Pangs Division had produced a high-volume, low value-added product range. However, the strategic emphasis of the division was changed some years ago and it now concentrates on highly specialized, large, high-quality, lower-volume products for two main related groups of customers. Demand is more predictable in these market areas and there is less competition but the market is still subject to major cyclical fluctuations. The division enjoys formally recognized status as a high-quality supplier with several of its major customers. Each new pro- duct needs expensive specially developed design work and tooling which is carried out under contract for a customer. Because of this there is a need to maintain the design and technical capability of the division. Only one other company in the world has a plant to match the new investment made by this division. More recently the division has made significant investments in computer-aided design and integrated automated manufacture of dies. The engineering manager is now arguing for the acquisition of a major new investment in forging equipment which would give a world lead to the company. However, the rest of the divisional management team are resisting the proposal and have decided not to support it. Details of the new investment proposal are as follows. The new proposed equipment would provide the division with a technical forging capability unmatched by any other company in the world and would help to develop markets for precision production of large part sizes which have been beyond the range of existing equipment.The financial projections are as follows: $m Initial investment Net cashflows 20 Year1 4 Year2 5 Year3 15 Year4 15 Year5 15 Net present value at 15% 13.16 You are required to discuss the use of divisional financial measures of performance using the information given for the Pangs Division as the basis for the discussion.
1.Majata is a large, long-established, and now widely diversified company mainly manufacturing industrial products in more than ten divisions. Divisional managers are paid a bonus which is largely dependent on the division meeting its budgeted
The new proposed equipment would provide the division with a technical forging capability unmatched by any other company in the world and would help to develop markets for precision production of large part sizes which have been beyond the range of existing equipment.The financial projections are as follows:
$m
|
Initial investment Net cashflows |
20 |
|
Year1 |
4 |
|
Year2 |
5 |
|
Year3 |
15 |
|
Year4 |
15 |
|
Year5 |
15 |
|
|
13.16 |
You are required to discuss the use of divisional financial measures of performance using the information given for the Pangs Division as the basis for the discussion.
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