The case "Magic Timber and Steel: Investment Evaluation with Net Present Value" is about the dilemma of buying new equipment or repairing/reviving the old equipment. Magic Timber is a timber and steel company founded in 1999. The company is based in Caloundra, which is on the Queensland Sunshine Coast. The company reached its peak in terms of sales revenue in the year 2011 and since then has had a steady decrease due to several reasons, which include infrastructure issues in the area and a slowing trend in the tourism market. Should the company invest in new equipment or just revive and invigorate the old equipment?
Scott McCarthy
Harvard Business Review (W16228-PDF-ENG)
April 21, 2016
Case questions answered:
- Should Magic Timber and Steel invest in new equipment or just revive and invigorate the old equipment?
- What is the quantitative analysis that you need to consider?
- What are the qualitative factors that you need to consider?
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Magic Timber and Steel: Investment Evaluation with Net Present Value Case Answers
Background of the Case Study – Magic Timber and Steel: Investment Evaluation with Net Present Value
The case “Magic Timber and Steel: Investment Evaluation with Net Present Value” is about the dilemma of buying new equipment or repairing/reviving the old equipment. Magic Timber is a timber and steel company founded in 1999. The company is based in Caloundra, which is on the Queensland Sunshine Coast.
The company reached its peak in terms of sales revenue in the year 2011 and since then has had a steady decrease due to several reasons, which include infrastructure issues in the area and a slowing trend in the tourism market.
Davidson’s problem started when he tried to understand the issue better – while there are external reasons contributing to the decline of revenue, the internal ones need a more stringent analysis and calculations.
The steel business has state-of-the-art equipment to support its line of business, but the timberline is being supported with old, risky, and becoming overly concerned equipment. So now, Davidson is facing the classic decision-making question. Should Magic Timber and Steel invest in new equipment or just revive and invigorate the old equipment?
What are the costs and factors that Davidson must consider and apply before making the decision? Is the timing appropriate to have the decision, or a later analysis will help more?
We will use the Net Present Value (NPV) method to analyze the quantitative factors and some sensitivity analysis by applying a 12% NPV, changing the purchase price of the new equipment, and changing the maintenance cost.
We will then see and give us a more objective and refined analysis based on our decision and action to take.
First, let us list the facts of the case:
**Forecasted Revenue and Net Profit were not considered in the analysis as they would be indifferent to both alternatives, so there was no effect on either buying or repairing the scenario.
Evaluation
Conditions:
NPV rate = 11%; Tax Rate = 30%
Based on these conditions, the better option for Magic Timber and Steel…
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Best decision to get my homework done faster!
Michael
MBA student, Boston
Best decision to get my homework done faster!