For fiscal year 2017, LaundryMate Products had income as follows: Sales $55,000,
ID: 2547458 • Letter: F
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For fiscal year 2017, LaundryMate Products had income as follows: Sales $55,000,000 Less: Cost of goods sold $ 38,400,000 Selling and administrative expense 5,700,000 Interest expense 1,000,000 45,100,000 Income before taxes 9,900,000 Less income taxes 3,465,000 Net income $ 6,435,000 Other pertinent information for 2017 follows: Total assets $ 97,000,000 Noninterest-bearing current liabilities 3,200,000 Required rate of return on invested capital 10% Required Calculate NOPAT, invested capital, and ROI for LaundryMate Products. Income tax rate = ÷ = NOPAT = + [ × ( )] = Invested capital = = ROI = = Comment on the company's profitability. What-if? Consider the following after you have completed the requirements of E12-8. Suppose LaundryMate Products had $11,000,000 of fully depreciated equipment of which it decided to dispose. Calculate ROI after the disposal of the equipment. NOPAT = + [ × ( )] = Adjusted invested capital = = New ROI = = What incentives might a manager have to dispose of assets? For fiscal year 2017, LaundryMate Products had income as follows: Sales $55,000,000 Less: Cost of goods sold $ 38,400,000 Selling and administrative expense 5,700,000 Interest expense 1,000,000 45,100,000 Income before taxes 9,900,000 Less income taxes 3,465,000 Net income $ 6,435,000 Other pertinent information for 2017 follows: Total assets $ 97,000,000 Noninterest-bearing current liabilities 3,200,000 Required rate of return on invested capital 10% Required Calculate NOPAT, invested capital, and ROI for LaundryMate Products. Income tax rate = ÷ = NOPAT = + [ × ( )] = Invested capital = = ROI = = Comment on the company's profitability. What-if? Consider the following after you have completed the requirements of E12-8. Suppose LaundryMate Products had $11,000,000 of fully depreciated equipment of which it decided to dispose. Calculate ROI after the disposal of the equipment. NOPAT = + [ × ( )] = Adjusted invested capital = = New ROI = = What incentives might a manager have to dispose of assets?Explanation / Answer
Income tax rate=3465000/9900000×100=35%
NOPAT= Net Operating profit after tax= (9900000+1000000)×(1-0.35)=7085000
Invested capital=97000000-3200000=93800000
ROI= 7085000/93800000=7.55%
Company Profitability: NOPAT means Net Operating profit after tax which means what is the result of Operations without being effected by Financial leverage. Suppose if the combination of Equity and Long term interest bearing debt is changed obviously there will be change in interest ecpense and thereby Net income. But NOPAT represents return from Equity and Long term debt after taxes. ROI is NOPAT which includes interest income after taxes/ Invested capital which includes Long term debt. ROI is 7.55% which is less than 10% reqd rate of return on Invested capital. This means that Company' s operations are not as per expectations. So Company has to look at the Operations and try to improve Operating profits. Also if required the Company has to look at Required rate of return on Invested capital. If it is unrealistic expectation than it has to revise or if it is minimum rate than it has to find out the reasons for less operating results and address them.
NOPAT=[7085000 + 11000000(1-0.35)]=14235000
Adjusted Invested Capital=93800000-11000000=82800000
New ROI=14235000/82800000=17.19%
Incentives for manager might be a % in sale proceeds of assets. Also the New ROI is more than Reqd rate of return on Invested capital, so the Manager can be encouraged by way of some % in returns if the New ROI after disposal of assets is more than ROI before disposal of assets.
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