an evaluation of past company decisions on equipment replacement
TRANSCRIPT
This article was downloaded by: [Columbia University]On: 08 December 2014, At: 03:28Publisher: Taylor & FrancisInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: MortimerHouse, 37-41 Mortimer Street, London W1T 3JH, UK
The Engineering Economist: A Journal Devoted tothe Problems of Capital InvestmentPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/utee20
An Evaluation of Past Company Decisions onEquipment ReplacementStephen T. Heinaman aa Armstrong Cork CompanyPublished online: 13 Sep 2010.
To cite this article: Stephen T. Heinaman (1956) An Evaluation of Past Company Decisions on EquipmentReplacement, The Engineering Economist: A Journal Devoted to the Problems of Capital Investment, 2:2, 1-18, DOI:10.1080/0013791X.1956.10131780
To link to this article: http://dx.doi.org/10.1080/0013791X.1956.10131780
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AN EVALUATION OF PAST COMPANY DECISIONS ON EQUIPMENT REPIACEMENT
by
Stephen T.. Heinaman~- - .
Armst z'ong Co:!'k Company
When I first considered writing a paper on this subject!) I thought that
an illustration of the ca l culati ons we make when we 6"i?al uate pas t c ompany de cisions
of equipment replacement would be e f f '8,;ti'J'l;;l o As I thought through the implementa~
tion of this approach, it be came appar ent to me t :b.a t the why of what we do i s of
infinitely greater significance than how we make t he mathemat i cal calculati ons o
Therefore" I decided that the be st; approach was t o give a comprehensive picture of
our capital appropriations requ es t eval uat ion procedures o
My thesis is that an eval ua t i on of pa.st company decisi ons for equipment
replacement can be most effective as a par t of a sys tem for evaluating all capital
appropriation requests, before and a f t er they are gr a nt ed , in a company which accepts
"return on investmentQl as t he basis f oZ" maas UZ'ing oper ating management performance"
To restate this for emphasis, be cause i t i s the basis of my presentat ion this after~
noon" an evaluation of past c ompany decisi ons for equipment replacement can be most
valuable to a company whe n s
I e I t fo l lows a n evaLuat.Lon made pr i or t o t he decisiont o a ppropri ate the speci fic f unds involved .,
2 e The eval uati ons a re madE! o~'!. a. basi s whi ch is directlyrelated to r out ine lirst,urn on inves t ment iQ reports usedas the bas i s f or measur i ng the pa r-f'or'mance ofoperat:ingmanager s e
30 No appropr iat ion 1"18'=111.6 8 ";:'8 (Jan escape eva l uation"
40 Management bases appY'op:riation decisions on the resultsof the eval uat i ons mads (I
My argument consist s ent.i:t'(f,1:'.r cf a des ::;r iption of t he system dev-eloped on
the basis of this t hesis f or t he A!'!f1'3~j1'orJ.g Co:rk Company, The system de s cribed ha s
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proven most effective in actual practiceo
Our system for evaluating capital appropriation requests does" quite
naturally, fulfill all of the requf.remerrbs of my thesis 0 All such requests are
evaluated before and after appropriation requests have been grantedo Management
does base its decisions on the results of the evaluations made, and our capital
appropriation request evaluation procedures are directly related to our regular
reporting of operating results since they are made on the same basis -- Return. on
Capital Employed, or as we say it,S)ROCEo
As we use .t he term, Retlli':~n on Capital Employed, despite its perhaps eso
teric connotations, is nothing more than the ratio of net profit after tax to total
book assets G In the .iArmst r ong Cork Company; ROCE is accepted as the basis for
measuring operating management performance 0 The success or failure of all of our
individual and collective efforts to improve operations is reflected in our RCCE
results 0
Quite a bit of attention has been directed to 11return on investment" and
its many variations in the recent past so that the chances are that you know all
about ito However, since it is the basis of our approach to capital appropriation
eva'luatd.on, I will risk boring you a bit with a few ROCE fundamentals as we apply
the concepto
Exhibit 1 illustrates the simpl icit,y of the concepb s ROCE:: Net Profit
After Tax divided by Av'erage Capital Emp'Loyed , Capital employed is _our total
assets as they appear on our ba lance sheet., Our basic measurement of operating
management performance, therefore,? i s not merely the amount of net profit we earn,
nor the amount of net sales achtieved, ncr the ratio of profit to sales (> ROCE re
tains these measurements but puts a base under them = the dollars of assets required
to achieve the sales and profits.. The effect:, of adding this base can be seen in
the formulas shown on Exhibi t 1 6 Profi t, sales and capital employed ar~ _all part
of the formuJationo We can and do state ouz- ROCE concept, as ROCE ;: %Profit on
Sales X Capital 'I'urnovez-, In the illustrati on $15,0000000 profit divided by
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$300g000,OOO of sal es equals 5% pr of it on sa l es . $300 ~ OOO ,000 of sales divided
by $150,000,000 of capi tal employed equals a capi t a l turnover of 2. ROCE then, is
5% X 2 or 10%0 If you prefer~ ROCE :: Net Profi t After Tax of $15~000~000 i ··Average Capital Employe~of $15? ~ OO?~000 or 10%0
The figures on t he l ower portion of Exhibi t 1 are shown to illustrate
the all~inclusive na t ure of our ROCE concept . The e~fec~ of sales Ls , of course
included~ all costs are also included ~ a nd , all assets are i ncl uded regardless of
the sources of funds used t o obtain t he m. Therefore, all aspects of operations are
included. However , the ef fect of va r ious means and results of financing are pur-
pasely excluded" We us e ROCE as the basis for measuring operating management per-
formance o
Ther e is some addi tional general ba ckground i nf or mat i on necessary to the
understanding of our capi tal appropr i a t ion request procedures -how our ROCE concept
is fitted to our internal mana gement organization.
Our int er na l ROCE concept is des i gned around our Division General Manager s .
These men are r espons i ble f or t he pr oduct ion and sale of all products within the
major market areas as s i gned t o themo .!All matters related to financing are r es erved
to a s t a f f vi ce=pres ident o The de termination of -m. at shall be financed i s reserved,
depending upon the amounts Lnvo'lved , t o the Execut ive Conunittee of our Board of
Directors or to t he Board i t sel f o
In practi~a 9 t he Boar d of Di r e(;tors and its Execut i ve Commi ttee control
''Wha t shall be financed~v almost ent i r el y through our system of capi~al appropri<:l,
tion requests. If we look at t he l ower right corner of Exhibit 1 we can see how
the control of capi tal expenditures a l one effects .basic level cont r ol s over al~ of
the capital employed by our Di vis ion Gener a l Mana gers except cash. Our Division
Manage rs have no direct respons ibil i ty f or t he l evel of cash. We assign cash to
them on the basi s of an arbi t rary percentage of t ota l cost of sales.
The gene ral l eve l of ac~ourrts r e©eivabls, inventor i es , and other assets
required by thei r operat ions i s det ermined bas i cally by the types of businesses in
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which t hey cperabe , Si nce we a r e primaril y a manufactur ing company, the types of
businesses we operate are es tabl i shed b;y the plants~ PI'0p~rty and equipment we buy.
Since t he Board of Director s and i ts Execut i ve Commit t ee control capital expendi-
tures~ t hey control t he bus i nesses we oper ate and ~ consequently,? the basi c levels
of a ccounts recei-vable ~ inventories ~ and other assets we employ._. . _.
The Di vision General Mana gers are responsible fo r u t i lizi ng the capital
whi ch t hey are gi ven by the Board t o obtain the best possible return on ito
FurthermoreJ) and t his is i mpor t ant $) the line men are r es pons i bl e for reconnnending
oppor-tuni,t ies for t he employment of a ddi t ional capi t al t o improve or expand exist~
i ng businesses and t o enter new bus ines ses 0 The Di vision Managers , therefore .l'
occupy 1my pos itions i n our company 0 The principal fun ction of our staff depart-
ments i s t o help t he l i ne men t o f ulfi ll the i r r es pons i b i lities. The line ment e
responsibi l i t i es a re t o obtain hi ghol" r et urns on more capi t a l » or~ in other words ,?
t o obtain super ior per f ormance a s measured by ROCE~ coupled with growth in and in-
t o businesses having high ROCE potent ial s u
So much for gener a l ba ckgrouni i nf or mat i on . Our procedures for review-
i ng capital appropr iat ion request s are designe d specifical ly t o fit the needs of
our organizat ion at t he present t i m® 0 They are designed pr imar ily to help line
management men t o f ulf i ll thei r res pons ibiliti e s by pointing up t he probable effect
of specifi c pot ent ial capit a l expendi t ures on t heir operating r es ults as expressed
in EDCE.. Empha s i s is placed on a ccura cy of per spect i ve rat~er t han of de tailo
Our capi tal appr opr i a t i on r eque s<:(, pr ocedur es ar e des i gned not to el iminate t he
necess i t y f or judgment~ but r a t her t o provi de a s ound bas i s f or t he application
of j udgment by all l evels of' managemenb, from t he bo ttom t o t he t OPll i n order t o
di s cover t he best of many pot ent i a l expenditures rath.~ t ha n to provide the f igur e
which makes aP:er oval ox." di s appr oval of a reques t mandat.or'y, The figur~s we de
velop aJrt~ relati ve ,\) not a b so 'ltrbe , The pr :b 20ipal u.s e ful nes s of our sys tem can
never be measured be cause it cons i sts of elimir~ting f rom considerat ion project s
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of doubtful or low ROCE potential before much expensive technical and management
effort is expended upon them"
In order to provide a sound basis for relative judgment, 'We highlight
important factors and key assumptions made, as well as the estimated results in-
dicated by our caLcul.atd.ons , The key factors and assumptions pointed up by our
procedures can be seen on Exhibit 2 which is the fa.cing sheet for a capital appro-
priation r-equeat , I never have found out why we call it an "M" request. All I
know is that an "w' request must be used for capital and maintenance jobs of $1,000
or more , and I canrt think of a shorter name for ito
The firs t important factor to be found on this request is the "Reason
for Request" e Ire have two categories of reasons for capital requests as shown on
Exhibit 3. Category I - Expenditures which are required to maintain ROCE on exist-.- - -
ing operations J and Category II = Expenditures which 'Wi 11 improve ROCE for the com-
pany, Company policy is to hold expenditures for Category I projects to a minimum,
and to maximize ROCE improvement with Category II expenditures. Therefore, when we
find Rebuilding or Replacement, or General Plant Improvement, or Safety, Health,
and1forking Conditions given as the QIReason for Request" we can be certain that no
significant IDOO advantage will be achieved through approval of the request. If
any sizeable savings were involved, the "Reas on for Request" would be "Cost Reduc-
Requests presented for Category I projects require policy and qualita-
tive decisions rather than specific quantitative calculations" The principal de-
cisions are whether or not we should continue in the business, and if or when we
need to spend the money requested to continue in the busdneas ,
The facts upon which these j u.dgments are based are obtained from our- -
roui~!~ ROCE report ing and f rom the written explanation W1 ich is a part of the re
quest 0 Although such requests sometimes generate special studies relative to stay
ing in the business,Sl there is no formal r equi r ement for mathematical evaluation of
• Gategory I requests.
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Category II requests are 8"'ir2.1u.ated foY'mallyo Looking at Exhibit 2 again,
we find a block for data to be i nsert ed by the Di vision Controllero These are the
data which are provided to management t o s ey'Ve as the basis for their selection for
approval of capital liMlI r equests desi gned to improve ROCEo The data in this block
have a wide readership s ince a l l capit al requests for $2,000 or more are circulated
through line management and to al l membe r s of the Executive Oomnrrttee before they
are formally presented fo r approval o
The information i n t he da ta bl ock indicates three separate things o
(1) Risk of Loss of t he Cash Expenditure Requested
An indication of t he risk of loss of the cash expenditurerequested is obtained by comparing the "Estimated EfficientProductive Per-i.od" with the liEstimated Period for Recoveryof Costo ll If the _Estinated Efficient Productive Periodd6esnot exceed the Estimat.ed Period for Recovery of Cost thereis a dist i.nct possibilj_ty thai:. at least some of the cash tobe i nvested would be 1osto
(2) Estimated Return on Average Total Added Capital Employedon an Operating Basis
The "Estimated Return on Average Total Added Capital Employed"as shown on the "Mil Request Form indicates the ratio of (1) ~
the ave rage added profit afte::..~ tax on an operating basis . to (2)the additional capi t al employed resulting from the requested .expenditures 0 The added capi t al employed includes all components such as cash, receivables, Lnvent.or'Les , property, plantand equipment, and miscellaneous assetso The amount estimatedfor each component is the average to be employed during theestimated effi cient productive period 8
The ca l culation of -the average added profit after tax used inthis ratio does not i nclude char ges for expense resulting fromcapi t a l expendi tur es or obs ol e s cence taken since these are considered as start~up c osts o
(3) Star-:t,=Up Costs
The aster i sked not e ulBef or e Charge for Expense and Obsolescenceof$ After Tax in Fi rst Year 11 indicates the amount ofthes® t wo i tems of s tar-b-up costs .after tax which would be incurred i f t he r equ es"c, wer e grarrted,
This amount i s us ed toget he r wi th the amount of "EstimatedAverage Added Profit After Taxi! shawn immediately above it toobtai n an indi ca·t i m.')', of t he effect of these ' costs on theiiEstimated Retur n on Average Total Added Capital Employed~1 ona,n operating basi so For example s
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(a) The es t inated r eturn on average t otal added capitalemployed on an operating basis i s indicated to be3608%0
(b) The est inated average added prof it after tax is indicated t o be $25, 000 per year.
(c) The charge for expense and ~bs oles cence after tax isi ndi cated t o be $l O, OOO e
The expense-and obsol es cence charge of $10,?000 after taxis equivalent t o two- fifths of the estimated average addedprofit after t ax per year o Therefore, the estimated returnon average t otal added capi t a l employed would be reduced to22~1% for the equi~alent, of one yearo
All of the data i ns ert ed by the '])i 'n s ion Controller in the data block on
the face of the "MIGRequest are obtained :trom an "Estimate Sheet" attached to the
'i},[l' Requests Exhibi t 4 shows this form which cont a i ns a summary of the calculations
supporting the data block figureso
You will note that we base our eva lua t ions on a standard reporting unit
such as a specifi c commodity,? group of ceoImlodit i e s ,? or plant. This approach gives
us a direct tie~in between our appropr iat ion r equest evaluations and our regular
ROCE reporting to managemerrt , When an app~CJpriation request has been granted, the
estimted cha nges in ROCE s houl d show u p ::111 our regular ?pera~ing reports. There
fo re,? our reguJ.a.r r out i ne analyses of ROGE r esul t s disclose to line managers the
results of speci fi c capi t a l expendf.t uz'e s on ROCE both as to amount and as to timing
on a continuing infornal basis.
Lines (1) and (2) of t he est i rrate sheet a re self-explanatoryo Line (3)
"Estimated Effi cient Product i ve Peri oduu r equires explanationo The "Estimated Effi-
cterrb Product ive Per-i.od" is the period of t i me during which the assumed conditions
necessary to t he increased ear nings a~~ expected t o exist o This estimate is re-
quired of line managers t o i ndi cate t he i r thinking as to t he possibility of 00001-
es cence of the pr cdu cte , pr oceseee, or equipment i nvolved,9 and to add a UVl engt h of
t i meU f a ctor to t he for ecas t s of sales v'Dil umes and cost/pr i ce relationships on
which the eval ua t ions are based , The es tima t e is expressed as a specific number of
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years if it is less than five years , If the IIEstimated E:fficient Productive
Period", or E.E.PoPo", is five years or more" this is indicated by a check mark in
the 19 5 or More Years Ui bl.ock,
The upper part of the foI'm,\l l ines (4) through (21) are used to spell out
the specific ar'&asof costs affected when cos t reduction is claimed ~l1 any capital
"Mil request involving an expenditure of $2$)000 or more , Only those operating cost
factors affected are considered in this calculat i on .. In the example shown en
Exhibit 4,\l the estimated "Total Costs Affected", l ine (14) of producing l,\lOOO~OOO
pieces of Commodity IIA" per year dll.ring the next five years is shown to be $700,000
with the present Flim mixers as compared with $650,000 with the proposed Flam mix""
ers , The difference, the IIA,verage Added Profit Before 'lax" of $50~000 shown on line
(1.5) is reduced by income tax to $25,\1000 on line (16) 0
For capital "WI r equest s involving expenditures of $2,,000 to $9,\l999,? the
only evaluation figure required is the gl Per i od for Recovery of Cost" 0 As sham on.
the form,\l t his is obtained by dividing the llTotal Funds RequestedU, line (1) by the
sum of the "Average Added Profit After 'I'ax"!) line (16),\l and the "Depreciation Dif
erence 81 between the present and proposed facilities, line (17) 0 In the example
shown the "Per-Led for Recovery of Cost ",\l line (19).9 is 3 ..3 years 0 This indicates
that it would take 303 years to recover the cash required by thE;l expenditure if the
request were grarrbed, "Period f or Rec ovar y of Costll i s an indication of risk in
that no return will be earned if t he original cos t is not recover-ed; In our dynamic
economy» technological progress i s at such a rapid rate that obsolescence of pro-
ducbs , processes and equipment is a dist inc:t possibilityo The longer the time.\) the
grea'ter the risk of obso'Lescence , Our nt]];st i mat ed Efficient Productive Period"
estimate represents the thinking of l i ne management as to the possibility of such
changes 0 As noted before we shaw both Recover y Period and Eo~oPoPo on the face of
the "WI request 4)
For all cat egor y II capital "MIl Requests involving expenditures of
$lOllOOO or more lines (20) t hrough (39) -are us ed to determine the "Return on• ~_~ ~ ~_~__ H ~ __ ~ _m _
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Average Total Added Capital EmployedU0 Lines (20) through (27) comprise a com
plete simplified profit and loss statement.. In the example shown the "Average
Added Profit After Tax"!J line (28) is $25J}000,:> the same as on line (16) above ,
The repe"tition of this figure is the r esult of' showing in profit and loss state
ment f orm how the anticipated cost redu ction would look in the routine operating
reports managers use in the normal cours e of their business ,
Lines (32) through (37) indicate the estimated composition of capital
employed during the test period 'Wi. th both present and. proposed facilitieso It
should be noted that we are dealing wi th average capital empLoyed , Therefore,? in
our example.') "Property" Plant and Equipment 1i .? line (5) is not increased by the full
amount of the capital expenditure of $100.:>0000 We have assumed a life of ten years
on the proposed mixers and a remaining l ife of five years on the present ones ,
ThereforeJ} the average net book value of the proposed mixers during the next five
years would be $75,9000 0 The average net book value of the old mixers would be
$5$000 $ one-half of the obsoles cence shown on l i ne (2)0 The difference of $70pOOO
would be t he increase in average ca pital employed in Property.'> Plant, and Equip-
"Return on Average Total Capital EmployedlU on an operating basis is cal
culated for both the present facilit ies and the proposed facilities and shown on
line (8) 0 These figures s erve to r aise t he question of whether or not we should
consider getting out of the business rather than to try to improve ito If we plan
to stay in a business through the tes t period,? then.') regardless of how lew the ROCE
is for the busfness , the "Return on Average Total Added Capital Empl?yedU on line
(39) is the ROCE figure which should be used as the basis for top managementts de ...
cisions as to which of the many appropr iation requests presented to them should be
granted 0 In our example, this key f igure i s 360 8%0
One other important factor should be nobed, The sales units and dollars
forecast for the current year are shown to point up the relationship between .cur
rent operations and the volumes and pri ces projected for the EoEoP.Po per-Lods In
b
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our example, the evaluation figures are based on an estimated increase in sales
volume of 25%0
All of these calculations are based on information available from our
routine ROCE reporting system plus estimates expressed in routine reporting termso
T~e calculations for requests of $10,000 or more are summarized in routine ROCE re
porting form. They are made primarily for the men responsible for operating results
through the joint efforts of division line and staff men assisted by top staff
specialists e The Division Contr oller for the division involved is responsible for
the coordination of all of these efforts, and for the direction of these efforts
toward accuracy of perspective rather t han of detail G The end result is a sound
and easily understood basis for division recommendations, and for top-management
selections, of those capital appropriat ion requests which have the greatest possi-
bility of improving ROOE for the company,
The pretesting procedures are by far the most valuable part of our capi-
tal appropriation request eval uating syetem, However, if we did not provide for
follow""'Up of the pre'test.Lng , it is possible that pretesting might» over a period of
years, become increasingly distorted by either over optimistic or super safe assump-
tionse We do follow...up our pretesting, informally, as already mentioned, in our
routine analyses of operating 'r esul t s whi ch are expressed as ROiCE, and formally.9 in
the form of annual reviews of capital appropriations of $10.9000 or moree
These annual reviews are set up in three parts as follows g
10 Status reports on unproven Category I appropriations20 Status reports on unproven Category II appropriations30 Completed and tested reports on Category II appropriations
The status reports on unproven Category I and Category II appropriations
are made on similar f'orms , An indication of t he form of status report for Category
II appropriations is shown as Exhibi t 50
The information shown on this report includes the date of original
approva13 description, actual expenditures t o date together with the amount origi
nally appr'ovedj; original estimated c ompl etion dabe j a brief statement to indicate
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the status and prospe cts f or t he proj s C't ,9 the number of months in operation; and
the original Eist irrate and i nd.i,ca t ed t o dat e recovery per-Lod, The only difference
between the forms for rcategor y I I and ca tegory I requests is that the recovery
period data are omitted on Category I repo~ts since t he recovery _period is not
usually calcul at ed for such r equests " The s tat us r-epor-ts for each category for
each year Lne.lude all a ppropr iat io)!1JJ:) granted up to June 30 of that year which have
not been compl e t ed and t ested l ong enough to satisfy management of the success or
failure of the appropriation0
On the CategoI7 II st a tus repor~s ~ the indicated recovery period is
shown to give an indi cation of the eval ua t ion of the project.. Recovery period was
selected as the indicator of actual resul ts on this report since its calculation in
volves the total of capital and expense expenditures as well as the added profit
realized~ and , more important ly,? because i ,t is t.he best indicator of probable suc
cess or failure of a proje l!3t in an interim repor-t , If the total experrliture will
probably not be r-eeover-ed, it i s of little importance to know the indicated operat
ing rate of RaCE which is not suffi cient t o r-ecover' i t,o
The calculations of "I ndicat ed Recovery Per-Lod" are made under the
direction of the ~ivision Cont roller.. On equipment replacement for cost reductionp
for examp'Ie , they consist, of detE9rmining the diff eJ:"ence be tween the actual costs
incurred and an estimate of what; t he coebs would have been if the .capital expenda-
ture had not been made , Since this i nvolyes es tdmabes , the emphasis is again
placed on accuracy of perspectdve r ather t han of detail Q
The completed and tested repoz-ts ox. Cat egory II appropriations include
all appropriations r emoved from the s t atus reports o Exhibit 6 shows the form of
these reports 0 They show t he o~iginal est imates t ogether with actual results as
to total expendi tures,? complet i on date~ r ecovery per iodp average annual operating
return on added capd.ba'l, emp'l.oyed ] annual average operating savings after tax$ and
fi rst yea!!! expense and obs o'Ieecenee a fter t ax 0
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-12"",
All of these annual review reports are prepared under the direction of
the Division Controllers. They are issued to the Division Manager" the President's
Office, and to the Chief Engineer just before the capital appropriations budget for
the following year is prepared; The status reports are designed primarily to en-
able division managers and top management to obtain a quick review of the status
and prospects of all unproven appropriation requests of $10,000 or more once a year,
just before the capital appropriation budget is drawn up for the following year.
The completed and tested Category II reports are primarily historical reports. They
are valuable in that their very existence serves to encourage objectivity in "M"
Request preparation, and the y also provide the basis for improving our capital
appropriations evaluation procedureso
It would be misleading to stop here, at the "end" of our capital appro-
priation evaluation system without repeating that this system is but one factor"
albeit a most important one, serving to help division managers to obtain superior
performance as measured by RaCEs coupled with growth in and into businesses having
high ROCE potentialso
My thesis is that an evaluation of past company decisions for equipment.
replacement. can be most effective if it is a part of a system for evaluating all
capital appropriation requests, before and after they are granted" in a company
whi ch accepts -return on Lnves'bmerrb" as the basis for measuring operating managa-
ment performance. My argument. is the system used by the Armstrong Cork Company,
which is most effective.
Presented before the Engineering Econo~
Committee at the Annual Meet i ng of theAmerican Society for Engineering Educationat Ames, Iowa, June 25, 1956.
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=13= EXHIBIT I
Armst r ong Cark Company
FUNDAMENTALS OF THE RoO oC oE 0 CONCEPI'
ROCE (Return on Capital Employed) ~ Net Prof i t Af t er TaxAver age Capi tal Empl oyed (Total Assets)
ROlGE ~ Net Profit After Tax Net Sal esNet Sales X Average Capital Empl oyed
ROCE ~ %Profit on Sales X Capital Turnover
RODE s $ 15»000»000$300»000.1'000
X $300»000»000$150» 000»000
ROCE :;;; X or
$ 203030
(MillionfGapi t al Employed
Cash and Securit iesAccount s Receivabl eI nventor iesPl ant 9 Proper t y arid Equi pment
(Net of Re se rves ) 60Other Assets 10
Total Capital Employed $150
Net Pro f it Afte r Tax(Millions ) ( %)
Sales $300 100-Less: --
Di rect Production Gost s $180 60Period Produ cti on Costs 30 10Selling Expense 30 10Administrative Expense 15 5Other Expense 15 5Federal Income Tax 15 5
Total Costs $285 95
Net Pr of it After Tax $ 15 .2
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EXHIBrr 2:
Pr oj to
No . 555700'Est c Camp <.
Dat e 7/1/55
Da t e < 1 'l/r" ~- ( ?
135Fl o r
Obso'Lescenee--~"---~----
_:..-;..~ ="M~Q REQUEST
Es t o Cost $ 110 1)000
=14=
Job Noe .Superse""d-e~s -,,""'ID"'-;;jl'--=Orde r Noo Pl ant .Bldg ~
-~---'----- ----~-~ - _ --::...::...
lO~OOO
,i..\
I,I
IrI
uct i on
Summary of Estima.ted Economic 'f a " - r
i n This Bl ock t o Be Inserted by Division Control ler
e .u r n on ver a ge ot a ~~ '''WOTE g Be f or e Cha rge fo r Expe nse & Obs o'Lea ceAdded capital Employed 36,8 % ~,ooo Aft.er Tax in F:ir s t Year
Title ' &t:*1~akifk;Y Q~~--Replace Fl i m Mol ded Linoleum Mixers wi t h Flam High SpeedM L'lCe r s .,
Pl a nt Dept ~
Mgl"G Dat ,®) 'Mg"~ DateJ "
Chief Di vo Gen&Ar chitEwt .: Dat ,e Mgr o Date
"' I
Asst .. ehf" Pr od "Engr , Dat e Mgr .• Date,
Chief V op ~
. Engr o Dat e ~Jlf" '~. Dat e• -~ b C>.
Gen o Pr ad o'Planning Mgro Dat e Control l er Date
Di r o of Exec, Dat eResear ch Dat e Co 1l1:1b Gr anted
Assoc " Di ro "':' '': ':,
of Res ear ch Dat o Ac count
For m1644 2=55 .Print edin Uni t ed St a t es of Amer i ca
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Ca t egory I
EXHIBIT 'j
Ar mst r ong COI 'k :Compa ny
CLA.SSIFICATIONS OF CA PITAL APPROPRIATION REQUESTSBY REASON FOR REQUEST
,--~-- ' ,~--~
Expendi tures which are requi r ed t o maintain RaCE oneXist ing ope rati ons
Rebui l di ng and Re pl .a cemerrsGener a.l Pl ant I mpr ovement,Sa f et y';; Hea l t h a nd Wor lring Condit ,ions
Expe ndi t ures wni.ch will i mprotv'e ROW for t he company
l~ Cost Redu~tion
2 0 Qua l i t y Improvement3" Capa ci t y Expa ns aon for Exi s t ,i ng Produ cts4" New Pr-odu cbs
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T(.
- 16 -
ESTIMATES OF PERIOD FOR RECOVERY OF COST AND RETURN ON CAPITAL EMPLOYED
o S YRS.llIAVG. YEAR DURING E.E.P.P.
Use lines numbered (~) through (21) to support any estimated cost reduction , Indicated In any requestregardless of category if line numbered (I) is $2,000 or more.
~---~.
"..... Replace FUm Mixers ldth Flam High DATE 12/20L54rlTLESpeed Mixers on CommodiV "All Line PROJECT NO. 555700
[,LiNT Floor P. & L. STATEMEN'r COMMOD ITV "A"(I) Total Funds Requested $ 110,000 (2) Obsolescence Requested $ 10,000
(a) Capital , $ 100,000 (3) Estimated Efficient { 6 or More Yrs. li1(b) Expense 10,000 Productive Period --Yrs.-
.....-;"11 Material,.- 5 Labor
6 Scrap
A. PRESENT FACILITIES
A'ioo.. ooo,nn nnn
"n,nnn
B. PROPOSED FACILITIES~J,Arl nnn
The Division Controller will use lines numbered (22) through (39) in accordance withoutlined in Section 13.2, Paragraph "e" of the Accounting Manual.
-7 Salaries8 Employee Benefits (IS% x Us f #7))
- 9 Power10 ReDal rs and Mal ntenance
16 Average Added Prof i t after Tax (50 "/0 of HISB)17 Add: Dep'n. Difference (f}IIB - HilA)18 Average Annual Amount Recovered (f}16'" f}17)19) Period for Recovery of Cost (HI : H18)
15.000Ii 000
20 0002.0008 000
-12,000~fnnn
'n nnnlnnnn'n nnn
h"n nnn,.
"in.nnn,.
21i.OOO,.
a.noo'.:l~.nnn
~.~ Yrs.
the procedure
FORECAST FORCURRENT YEAR
AVG. YEAR DURING E.E.P.P.A. PRESENT FACILITIES
o S YRS. tlB. PROPOSED FACILITIES
20 Sales Units _ 'Dol ..,.....
(000)
son(000)
, .nno(000 ), nnn
~, nnn21 Het Sales22 Plant Direct Cost23 Plant Period COllt2~ Sell ing Expense
tl..OOO
100 ,nn
,.,.
25 Administrative Expense26 Prof i t before Tax27 Profit after Tax. 50 %28 Average Added Prof i t after Tax (l27B - H27A)
100'iO
l,.n ,.,.,.
29 Add: Dep'n. Cost in f}23B Less Dep'n. Cost In H23A30) Average Annual Amount Recovered (US + H29)31 Period for Recovery of Cost (II : H30) Yrs.32) Cash
33) Receivables3~ ' I nvent or ies35 Property, Plant, and Equipment
1'iOlOO ./,,70
36 Miscellaneous37 Average Total Capital Employed.!8 Return on Average Total Capital Employed (1I27 ...... f}'37)
.!! Return on Average Total Added Capital Employed (l28+(1I37B-1I37A))
7117.CYt.
77q
36.8t
,.,.
Robert V, JonesPLANT CONTROLLER
'Ri chard M. BlackDIY. CONTROLLER
LI nee numbe red(3) and (20)through (39)
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r "E""£'t!I Of' C..."l'E..O...... \,CAPITAL API'II.OP!l,ATIOII. Of "0,000 AIIO O~Ell
Exhibit 5
I
I-'-..l
57 8-55
MO. OF 140S. RECOVERY PER I 00OR IGI NAL1M ACTUAL
-TOTAL EXPENO I TURES
ESTI MATEDSTATUS OPERATION Or ig i nal Indicated
DATE OFPROJECT OESeR IPTI ON
Orig inal COMPLET IONTO Est imat e to
ITEM ORIGINALActua l
OATEMO. APPROVAL MO.
to Est i ",ate
p--- • • _- -
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- - -_.__.- -------REPORT Of
COMPLETED AID TESTED CATE60IY II PROJECTS
lyb2bit. 6
I
I-'CO
8-55
f I1ST YEAR CHARGEAVERAGE
AIIIUAl AVERAGEfOR EXPEISE
TOTAL COMPlETlOI YEARS RECOVERY AIIUAl OPERATlleOPERATlIG SAV IIGS
RESULT IIG fROM
ITEM DATE Of PROJECT EXPEID nUKES DATE 'NClUDED PERIOD RETURN 01 ADDEDAfTER TAl
CAPITAL EXPEIDITURES
10. ORIGINAL lUMBERDESCR IPTI01 AID COMMENTS II TEST CAP ITAL EMPLOYED AIID OBSOLESCENCE
APPROVAL PERIOD AfTER TAX
Actual OriginalActual
Orig inal Indicated OriginalActual
OriginalActual
Orlgina' Original
Coet Esti.ate Estlute Actua' Eati.ate Eatl.ate EaU.ateActual Eat i.ate
<-- IIrn .. rr
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