Exhibit 3: Alternative Calculation of Shareholder Value Added (SVA) Year NOPAT A NOPAT A NOPAT capitalized PVA NOPAT capitalized Σ PV of A NOPAT capitalized Investment PV of investment Shareholder value added Source: Counterpoint Global. Base 1 100.0 108.0 2 116.6 3 126.0 4 5 6 7 8 9 10 11 136.0 8.0 114.3 8.6 123.4 9.3 133.3 106.8 10.1 10.9 11.8 144.0 155.5 167.9 107.8 108.8 109.8 110.9 111.9 146.9 158.7 171.4 185.1 12.7 13.7 181.4 195.9 211.5 112.9 114.0 115.1 199.9 215.9 14.8 16.0 Sum 228.5 Inflows 116.1 1,114.1 Sum 32.0 29.9 34.6 37.3 30.2 30.5 40.3 43.5 47.0 50.8 30.8 31.0 31.3 31.6 54.8 59.2 31.9 32.2 64.0 32.5 Outflows 312.0 Inflows Outflows =Total SVA 76.9 77.6 78.3 79.1 79.8 80.6 81.3 82.1 82.8 83.6 802.2 Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; A=change in; Σ=sum of. We are now ready to solve for MEROI, which is the discount rate at which the present value of the incremental NOPAT inflows equals the present value of the investment outflows discounted at the cost of capital. Exhibit 4 shows that we need a 16.2 percent rate in order for the present value of incremental NOPATS to equal the present value of investments. Since 16.2 percent is well above the cost of capital of 7 percent, we know that the PVGO is positive. © 2024 Morgan Stanley. All rights reserved. Morgan Stanley | INVESTMENT MANAGEMENT Exhibit 4: Calculation of Market-Expected Return on Investment (MEROI) Year Base 1 2 6642569 Exp. 05/31/2025 4 COUNTERPOINT GLOBAL 3 4 5 6 7 8 9 10 Present value of investments (outflows) discounted at the cost of capital Investment PV of investment 32.0 34.6 37.3 40.3 29.9 30.2 30.5 30.8 43.5 47.0 31.0 31.3 50.8 54.8 59.2 64.0 31.6 31.9 32.2 32.5 Σ PV of Investment 312.0 Present value of NOPAT (inflows) discounted at the MEROI NOPAT 100.0 108.0 116.6 126.0 136.0 146.9 158.7 171.4 185.1 199.9 215.9 A NOPAT 8.0 8.6 9.3 10.1 10.9 11.8 12.7 13.7 14.8 16.0 A NOPAT capitalized PVA NOPAT capitalized 49.3 53.3 42.4 57.5 62.1 67.1 72.5 78.3 84.5 91.3 98.6 39.4 36.7 34.1 31.7 29.4 27.3 25.4 23.6 21.9 Σ PV of A NOPAT capitalized 312.0 Market expected return on investment 16.2% Source: Counterpoint Global. Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; Σ=sum of; A=change in.

Exhibit 3: Alternative Calculation of Shareholder Value Added (SVA) Year NOPAT A NOPAT A NOPAT capitalized PVA NOPAT capitalized Σ PV of A NOPAT capitalized Investment PV of investment Shareholder value added Source: Counterpoint Global. Base 1 100.0 108.0 2 116.6 3 126.0 4 5 6 7 8 9 10 11 136.0 8.0 114.3 8.6 123.4 9.3 133.3 106.8 10.1 10.9 11.8 144.0 155.5 167.9 107.8 108.8 109.8 110.9 111.9 146.9 158.7 171.4 185.1 12.7 13.7 181.4 195.9 211.5 112.9 114.0 115.1 199.9 215.9 14.8 16.0 Sum 228.5 Inflows 116.1 1,114.1 Sum 32.0 29.9 34.6 37.3 30.2 30.5 40.3 43.5 47.0 50.8 30.8 31.0 31.3 31.6 54.8 59.2 31.9 32.2 64.0 32.5 Outflows 312.0 Inflows Outflows =Total SVA 76.9 77.6 78.3 79.1 79.8 80.6 81.3 82.1 82.8 83.6 802.2 Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; A=change in; Σ=sum of. We are now ready to solve for MEROI, which is the discount rate at which the present value of the incremental NOPAT inflows equals the present value of the investment outflows discounted at the cost of capital. Exhibit 4 shows that we need a 16.2 percent rate in order for the present value of incremental NOPATS to equal the present value of investments. Since 16.2 percent is well above the cost of capital of 7 percent, we know that the PVGO is positive. © 2024 Morgan Stanley. All rights reserved. Morgan Stanley | INVESTMENT MANAGEMENT Exhibit 4: Calculation of Market-Expected Return on Investment (MEROI) Year Base 1 2 6642569 Exp. 05/31/2025 4 COUNTERPOINT GLOBAL 3 4 5 6 7 8 9 10 Present value of investments (outflows) discounted at the cost of capital Investment PV of investment 32.0 34.6 37.3 40.3 29.9 30.2 30.5 30.8 43.5 47.0 31.0 31.3 50.8 54.8 59.2 64.0 31.6 31.9 32.2 32.5 Σ PV of Investment 312.0 Present value of NOPAT (inflows) discounted at the MEROI NOPAT 100.0 108.0 116.6 126.0 136.0 146.9 158.7 171.4 185.1 199.9 215.9 A NOPAT 8.0 8.6 9.3 10.1 10.9 11.8 12.7 13.7 14.8 16.0 A NOPAT capitalized PVA NOPAT capitalized 49.3 53.3 42.4 57.5 62.1 67.1 72.5 78.3 84.5 91.3 98.6 39.4 36.7 34.1 31.7 29.4 27.3 25.4 23.6 21.9 Σ PV of A NOPAT capitalized 312.0 Market expected return on investment 16.2% Source: Counterpoint Global. Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; Σ=sum of; A=change in.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

NOPAT inflows equals the present value of the investment outflows discounted at the cost of capital (e breakeven rate that equates the present value of the capitalized annual NOPAT changes to the present value of the investments). In the picture, they got 16.2% as MEROI but I don't know how they got this value. So please explain and resolve specifically.

Also is there an equation for solving MEROI?

I have attached a picture of the problem. Please solve in on paper!

Note: Assumes 8% NOPAT growth, 25% ROIIC, and 7% cost of capital; Δ=change in; Σ=sum of