Magic Timber and Steel: Investment Evaluation with Net Present Value
(3 pages of text)
Magic Timber and Steel (Magic) was formed in Caloundra, a community on Queensland, Australia’s Sunshine Coast. Magic’s business peaked in terms of sales revenue in about 2011 and went on to experience a steady decrease in turnover that was attributed to a number of causes, including infrastructure issues on the coast and a drop in tourism. Hoping to reinvigorate the business in early 2015, Magic’s owner believed his company required an investment in fixed assets — specifically, a large finisher that would increase capacity and reduce maintenance. Because the new machine required a significant financial investment, the owner had to use the net present value method to determine whether the purchase would add value to the firm.
The case has a number of objectives aimed at enhancing student learning:
- It provides a real-world example of a company that must make a significant investment decision.
- It has been designed as a repair-versus-replace decision rather than as a simple investment decision, so students gain an understanding of the practice of making a choice between two alternative investments.
- It requires students to think outside the strict net present value analysis and consider qualitative factors that may override the net present value decision.
- It requires that students communicate their final decision through a brief report, so it is necessary that they understand what the analysis is telling them.
Australia, Small, 2015
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