What incentives might a manager have to dispose of assets?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Can someone please tell me if I'm on the right track, and complete the missing cells by completing the forumulas? Thank you.
![**Understanding Financial Metrics: An Educational Overview**
Here we break down key financial calculations for LaundryMate Products using a spreadsheet format. The aim is to calculate Net Operating Profit After Taxes (NOPAT), invested capital, and Return on Investment (ROI).
**Sales and Expenses:**
- **Sales**: $55,000,000
- **Cost of Goods Sold**: $38,400,000
- **Selling and Administrative Expenses**: $5,700,000
- **Interest Expense**: $1,000,000
**Income Calculations:**
- **Income Before Taxes**:
- Calculated as Sales minus Cost of Goods Sold and Selling & Administrative Expenses ($55,000,000 - $38,400,000 - $5,700,000 = $10,900,000).
- Subtract Interest Expense ($10,900,000 - $1,000,000 = $9,900,000).
- **Less Income Taxes**:
- Income Before Taxes ($9,900,000) multiplied by Income Tax Rate (20%) = $1,980,000.
- **Net Income**:
- Income Before Taxes minus Income Taxes ($9,900,000 - $1,980,000 = $7,920,000).
**Other Financial Information:**
- **Total Assets**: $97,000,000
- **Non-interest Bearing Current Liabilities**: $3,200,000
- **Required Rate of Return on Invested Capital**: 10%
**Key Calculations:**
1. **NOPAT:**
- Formula: NOPAT = Income Before Taxes + (Interest Expense x (1 - Tax Rate))
- Calculation: $9,900,000 + [$1,000,000 x (1 - 0.20)] = $10,700,000
2. **Invested Capital:**
- Formula: Invested Capital = Total Assets - Noninterest-bearing Current Liabilities
- Calculation: $97,000,000 - $3,200,000 = $93,800,000
3. **ROI:**
- Formula: ROI = NOPAT / Invested Capital
- Calculation: $10,700,000 / $93,800,000 = 11.4%
**Diagram Explanation:**
The spreadsheet lists sales, various expenses, and detailed steps for the N](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4fc04862-5813-4b4f-893b-efba24448b50%2F38bf4b73-0358-4085-a516-0d25a058bb7f%2Frx9p7f_processed.png&w=3840&q=75)
Transcribed Image Text:**Understanding Financial Metrics: An Educational Overview**
Here we break down key financial calculations for LaundryMate Products using a spreadsheet format. The aim is to calculate Net Operating Profit After Taxes (NOPAT), invested capital, and Return on Investment (ROI).
**Sales and Expenses:**
- **Sales**: $55,000,000
- **Cost of Goods Sold**: $38,400,000
- **Selling and Administrative Expenses**: $5,700,000
- **Interest Expense**: $1,000,000
**Income Calculations:**
- **Income Before Taxes**:
- Calculated as Sales minus Cost of Goods Sold and Selling & Administrative Expenses ($55,000,000 - $38,400,000 - $5,700,000 = $10,900,000).
- Subtract Interest Expense ($10,900,000 - $1,000,000 = $9,900,000).
- **Less Income Taxes**:
- Income Before Taxes ($9,900,000) multiplied by Income Tax Rate (20%) = $1,980,000.
- **Net Income**:
- Income Before Taxes minus Income Taxes ($9,900,000 - $1,980,000 = $7,920,000).
**Other Financial Information:**
- **Total Assets**: $97,000,000
- **Non-interest Bearing Current Liabilities**: $3,200,000
- **Required Rate of Return on Invested Capital**: 10%
**Key Calculations:**
1. **NOPAT:**
- Formula: NOPAT = Income Before Taxes + (Interest Expense x (1 - Tax Rate))
- Calculation: $9,900,000 + [$1,000,000 x (1 - 0.20)] = $10,700,000
2. **Invested Capital:**
- Formula: Invested Capital = Total Assets - Noninterest-bearing Current Liabilities
- Calculation: $97,000,000 - $3,200,000 = $93,800,000
3. **ROI:**
- Formula: ROI = NOPAT / Invested Capital
- Calculation: $10,700,000 / $93,800,000 = 11.4%
**Diagram Explanation:**
The spreadsheet lists sales, various expenses, and detailed steps for the N
Transcribed Image Text:**Analyzing the Disposal of Assets**
In this exercise, we consider the implications of disposing of fully depreciated equipment on a company’s Return on Investment (ROI). The example given involves LaundryMate Products, which had $11,000,000 worth of fully depreciated equipment.
### NOPAT Calculation
- **NOPAT =** The formula for NOPAT (Net Operating Profit After Tax) is not fully specified, but includes terms for adjustments based on the disposal.
### Adjusted Invested Capital
- **Adjusted Invested Capital =** This value needs to be recalculated after the disposal of the equipment, which affects the company's invested capital.
### New ROI Calculation
- **New ROI =** Using the adjusted values of NOPAT and invested capital, the company needs to compute a new ROI figure.
### Considerations for Managers
**Question:** What incentives might a manager have to dispose of assets?
**Discussion:** Managers may have several incentives for disposing of assets:
1. **Improving Financial Ratios:** Disposing of fully depreciated assets can improve financial metrics and ratios.
2. **Reducing Maintenance Costs:** Older, fully depreciated equipment might incur higher maintenance costs.
3. **Freeing Up Capital:** Selling unused equipment can free up capital for more strategic investments.
4. **Operational Efficiency:** Streamlining operations by removing outdated or redundant equipment.
This exercise helps highlight strategic financial considerations and challenges in asset management and disposal.
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