Appendix $12$B: Parsimonious Method for Forecasting NOPAT and NOA This appendix explains a parsimonious method to obtain forecast for net operating profit after tax $($NOPAT$)$ and for net operating assets $($NOA$).$ This method requires three crucial inputs: $1.$ Sales growth. $2.$ Net operating profit margin $($NOPM$)$; Defined in Module $4$ as NOPAT divide by sales. $3.$ Net operating asset turnover $($NOAT$)$; defined in Module $4$ as sales divide by average NOA. $($For forecasting purposes, we define NOAT as sales divide by year$-$end NOA instead of average NOA because we want to forecast year$-$end values.$)$ Multiyear Forecasting with Parsimonious Method We use Procter & Gamble$$s $2016$ income statement from Exhibit $12\mathrm{.}2,$ and its $2016$ balance sheet form Exhibit $12\mathrm{.}3,$ to determine the following measures. We assume that P&G$$s statutory tax rate is $37\%$ on nonoperating revenues and expenses. $ millions Sales $2016$ $$65,299$ Net operating profit after tax $($$$13,441-[$$$3342+($$$579-$$$182-$$$325)\backslash$times $37\%])$ $$10,072$ NOA $($$$127,136-$$$7,102-$$$6,246-$$$7,185-$$$9,325-$$$7,449-$$$9,113$$$10,325)*$ $$70,391$ NOPM $($$$10,072/$$$65,299)$ NOAT $($$$65,299/$$$70,391)15\mathrm{.}4\%0\mathrm{.}93*$we use ending balance sheet amounts, rather than average amounts, because we forecast ending balance ending balance sheet amounts. Each year$$s forecasted sales is the prior year sales multiplied successively by $(1+$ growth rate$)$ and then rounded to whole digits. Consistent with our prior revenue growth rate assumption for P&G$,$ we define $1+$ growth rate$$ as $1\mathrm{.}01$ for $2017$ and $1\mathrm{.}02$ for $2018$ onward. NOPAT is computed using forecasted $($ and rounded$)$ sales each year times the $2016$ NOPM of $15\mathrm{.}4\%$; and NOA is computed using forecasted $($and rounded$)$ sales divided by the $2016$ NOAT of $0\mathrm{.}93.$ Forecasted numbers for $2017$ through $2020$ are in Exhibit $12$B$\mathrm{.}1$; supporting computations are in parentheses. This forecasting process can be continued for any desired forecast horizon. Also, the forecast assumption such as sales growth, NOPM, and NOAT can be varied by year, if desired. This parsimonious method is simpler than the method illustrated in this method. However, its simplicity foregoes information than can improve forecast accuracy. Exhibit $12$B$\mathrm{.}1$ P&G Parsimonious Method Forecasts of Sales, NOPAT and NOA Reported $ millions Forecast $20162017$ Est. $2018$ Est. $2019$ Est. Net sales growth $1\mathrm{.}0\%2\mathrm{.}0\%2\mathrm{.}0\%2020$ Est. Net sales $($unrounded$)$ $$65,299$ $$65,951\mathrm{.}992\mathrm{.}0\%$ $$67,271\mathrm{.}03($$$65,299\backslash$times $1\mathrm{.}01)$ $$68,616\mathrm{.}45$ $$69,988\mathrm{.}78$ Net sales $($rounded$)($$$65,951\mathrm{.}99\backslash$times $1\mathrm{.}02)$ $$65,299$ $$65,952$ $$67,271($$$67,271\mathrm{.}03\backslash$times $1\mathrm{.}02)$ $$68,616($$$68,616\mathrm{.}45\backslash$times $1\mathrm{.}002)$ NOPAT$$ $$69,989$ $$10,072$ $$10,157($$$65,952\backslash$times $0\mathrm{.}154)$ $$10,360$ $$10,567$ $$10,778$ NOA$^2($$$67,271\backslash$times $0\mathrm{.}154)$ $$70,391$ $$70,916$ $$72,334($$$68,616\backslash$times $0\mathrm{.}154)($$$69,989\backslash$times $0\mathrm{.}154)$ $$73,781($$$65,952/0\mathrm{.}93)($$$67,271/0\mathrm{.}93)$ Forecasted NOPAT $=$ Forecasted net sales $($rounded$)\backslash$times $2016$ NOPM $^2$ Forecasted NOA $=$ Forecasted net sales $($rounded$)-$: $2016$ NOAT