Suppose a firm is comparing two plans (Plan A and Plan B). Under both the plans, each plan is expected to produce 110 million units (Q) per year (all the units are expected to be sold) at a sales price (P) of $2 per unit. Plan A’s technology requires a smaller annual fixed cost (F) than Plan B’s, but Plan A has higher variable costs (V) as shown below. The firm will execute the plans entirely by equity. Find the NOPAT, ROIC, ROA and ROE under both the plans. Assume total asset of the firm is 202 and equity is 200. Assume tax rate 40%.

                                    Plan A    Plan B

Sales                               220       220

Fixed Cost (F)                   20        60

Variable Cost (V)             165        110

Comment on the sensitivity of ROA v/s quantity sold.

Answer rating: 100% (QA)

Explanationfor step 2 ROA Net IncomeTotal AssetsROE ... View the full answer