Quantify the Effects of Managerial Actions on ROPI and Components
Rincon Farms Inc. reports the following financial data just prior to its fiscal year ended December 31, 2019 ($ millions).

Rincon Farms Inc.
Balance Sheet
Cash	$100	Accounts payable	$300
Accounts receivable	300	Long-term debt	600
Inventory	500
Property, plant & equipment	1,000	Equity	1,000
Total assets	$1,900	Total liabilities and equity	$1,900

	Actual	Forecasted
	Dec. 2019	Dec. 2020
Sales	$1,200	$1,310
NOPAT	$210	$216
NOA	$1,500	$1,545
WACC	7%

a. Compute ROPI for FY2019 and FY2020. Net operating assets (NOA) at the beginning of 2019 were $1,350.
Round answers to one decimal place, if applicable.

	2019	2020
ROPI	Answer	Answer

b. The company is contemplating taking the following actions before the end of 2019. (These actions are not reflected in any of the financial data reported above.) For each of the actions, determine the effect on residual operating income for the fiscal year ended December 31, 2020.

Reduce inventory by 10% which reduces accounts payable by 5%.

1. Decrease property, plant and equipment (PPE) by 20% with no consequent impact on NOPAT.
2. Engage in a sale leaseback of a major building. The company will sell 50% of its PPE at book value and increase rental costs by $30 after tax, per year.
3. Increase debt $300, which increases interest expense by $15.

Round answers to one decimal place, if applicable.

	Actual	Forecasted		Action
	Dec 2019	Dec 2020		1	2	3	4
NOPAT	Answer	Answer		Answer	Answer	Answer	Answer
NOABeg	Answer	Answer		Answer	Answer	Answer	Answer
ROPI	Answer	Answer		Answer	Answer	Answer	Answer

Answer rating: 100% (QA)

a To compute the ROPI for FY2019 and FY2020 we first need to calculate the net operating profit after tax NOPAT for each year and the net operating as... View the full answer