mrc

usually an engineering problem. You know exactly how much a new machine will cost and you can be fairly certain about how many man-hours will be saved. On a volume expansion you’re betting on a marketing estimate and maybe the date for getting a plant on stream. These are fairly uncertain variables.

On a new product appropriation, things get even worse. Here you’re betting on both price and volume estimates, and supporting data can get awfully thin. Overall, I think our cost reduction projects have probably yielded higher returns and have been less risky than either plant expansion or new product proposals. They don’t, of course, eat up anything like the amount of capital that the other two types of projects can require.

The third and perhaps most important item that I look for is the name of the division manager who sent the project up. We’ve got managers at the top and at the bottom of the class just like any organization. If I get a project from an individual who has been with the company for a few years, who has turned a division around, or shown that he has a better command of his business than anyone else in his industry, then I’ll usually go with his judgment. If his business is going to pot, however, I may take a long hard look, challenge a lot of the assumptions, and ask for more justification.

Fourth, I look at the ROI figure. If the project is a large one, I have the finance people massage the numbers to see what happens to the ROI if some of the critical variables like volume, prices, and costs are varied. This is an area where knowing your division manager is enormously important. Some managers, particularly those with a sales background, may be very optimistic on volume projections. In this kind of situation you feel more comfortable if you can knock the volume down 25% and still see a reasonable return.

I haven’t established formal and inviolable hurdle rates, which each and every project must clear. I want to avoid giving the division people an incentive to stretch their estimates on marginal projects or, alternatively, to build in fat cushions—insurance policies—on great projects. Still, I generally look for a minimum DFC-ROI of about 12% on cost reduction proposals, 15% to 16% on large volume expansion projects, and 18% to 20% or even more on new product introductions. But these aren’t magic numbers. Projects showing lower yields are sometimes accepted.

Strategic Capital Investments

Brinton later commented on the role of capital budgeting in overall corporate strategy:

In general we’ll invest our capital in those business areas that promise the highest return. Usually you can’t afford to establish a position in a market on just the hope that a return will materialize in the future. Du Pont can afford to invest $75 million in a new fiber, but MRC can’t. We can afford to invest a few million dollars in projects of this nature—and we have in areas like continuous casting and iron ore pelletizing—but most of our projects have to promise a prompt return.

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Exhibit 1 Four-Year Summary of MRC Financial Data (dollar figures in millions except per share data)

a.Net earnings plus depreciation, amortization, and deferred taxes, less preferred dividends.

b.Calculated on average number of shares outstanding during the year.

Exhibit 2 Acquisition History of MRC, Inc.

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Exhibit 3 Five-Year Summary of Financial Data on American Rayon, Inc. (dollar figures in millions except per share data)

a. Based on 1,851,255 common shares outstanding.

Exhibit 4 Balance Sheet of American Rayon, Inc., as of December 31, 1960 (in thousands of dollars)

a. Carried at cost plus accrued interest, which approximates market.

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274-118 MRC, Inc. (A)

Exhibit 5 Consumption of Tire Cord

Source: 1947-1955: U.S. Bureau of the Census, Statistical Abstract of the United States—1967 (Washington, D.C.: U.S. Government Printing Office), p. 761; 1956–1960: American Rayon, Inc., Proxy Statement, March 28, 1961 p. 6.

Exhibit 6 Pro Forma Income Statements of American Rayon, Inc. (in thousands of dollars)

Exhibit 7 Three-Year Forecast of MRC Earnings

a.Assumes funding for all projects tentatively approved in 1961 capital budget, but no new acquisitions.

b.Based on 2,706,896 common shares outstanding and preferred dividends of $760,000.

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