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Quantify the effects of managerial actions on ROPI and components.

Rincon Farms Inc. reports the following financial data just prior to its fiscal year ending December 31, 2019 (in millions of dollars).

Note: Complete the entire question in Excel and format each answer to two decimal places. Then enter the answers into the provided spaces below with two decimal places.

\begin{tabular}{|l|r|l|r|}
\hline \multicolumn{2}{|l|}{\begin{tabular}{l}
Rincon Farms Inc. \\
Balance Sheet
\end{tabular}} & & \\
\hline Cash & [tex]$\$[/tex] 75[tex]$ & Accounts payable & $[/tex]\[tex]$ 225$[/tex] \\
\hline Accounts receivable & [tex]$\$[/tex] 225[tex]$ & Long-term debt & $[/tex]\[tex]$ 450$[/tex] \\
\hline Inventory & [tex]$\$[/tex] 500[tex]$ & & \\
\hline Property, plant \& equipment & $[/tex]\[tex]$ 750$[/tex] & Equity & [tex]$\$[/tex] 875[tex]$ \\
\hline Total assets & $[/tex]\[tex]$ 1,550$[/tex] & Total liabilities and equity & [tex]$\$[/tex] 1,550[tex]$ \\
\hline
\end{tabular}

\begin{tabular}{|c|c|c|c|}
\hline & Actual & & Forecasted \\
\hline & Dec. 2018 & Dec. 2019 & Dec. 2020 \\
\hline Sales & & $[/tex]\[tex]$ 900$[/tex] & [tex]$\$[/tex] 983[tex]$ \\
\hline NOPAT & & $[/tex]\[tex]$ 210$[/tex] & [tex]$\$[/tex] 216[tex]$ \\
\hline NOA & $[/tex]\[tex]$ 1,013$[/tex] & [tex]$\$[/tex] 1,250[tex]$ & $[/tex]\[tex]$ 1,159$[/tex] \\
\hline WACC & & [tex]$7\%$[/tex] & \\
\hline
\end{tabular}



Answer :

GinnyAnswer
To quantify the effects of managerial actions on ROPI (Residual Operating Profit After Tax) for Rincon Farms Inc., we shall begin by understanding the given financial data and using it to calculate ROPI for the years 2019 and 2020.

### Definitions:
- NOPAT (Net Operating Profit After Tax): Represents the company’s potential cash earnings if it had no debt.
- NOA (Net Operating Assets): Represents the company's operating assets minus operating liabilities.
- WACC (Weighted Average Cost of Capital): Represents the company's cost of capital with a blend of both equity and debt.

### Formula:
[tex]\[ \text{ROPI} = \text{NOPAT} - (\text{WACC} \times \text{NOA}_{\text{Previous Year}}) \][/tex]

### Step-by-Step Calculation:

#### 1. Calculate ROPI for 2019:
- NOPAT for 2019: \[tex]$210 million. - NOA for the end of 2018: \$[/tex]1013 million.
- WACC: 7% (or 0.07 as a decimal).

[tex]\[ \text{ROPI}_{2019} = \text{NOPAT}_{2019} - (\text{WACC} \times \text{NOA}_{2018}) \][/tex]

Plugging in the numbers:
[tex]\[ \text{ROPI}_{2019} = \$210 - (0.07 \times \$1013) \][/tex]
[tex]\[ \text{ROPI}_{2019} = \$210 - \$70.91 \][/tex]
[tex]\[ \text{ROPI}_{2019} = \$139.09 \][/tex]

Therefore, ROPI for 2019 is \[tex]$139.09 million. #### 2. Calculate ROPI for 2020: - NOPAT for 2020: \$[/tex]216 million.
- NOA for the end of 2019: \[tex]$1250 million. - WACC: 7% (or 0.07 as a decimal). \[ \text{ROPI}_{2020} = \text{NOPAT}_{2020} - (\text{WACC} \times \text{NOA}_{2019}) \] Plugging in the numbers: \[ \text{ROPI}_{2020} = \$[/tex]216 - (0.07 \times \[tex]$1250) \] \[ \text{ROPI}_{2020} = \$[/tex]216 - \[tex]$87.50 \] \[ \text{ROPI}_{2020} = \$[/tex]128.50 \]

Therefore, ROPI for 2020 is \[tex]$128.50 million. ### Summary of Results: - ROPI (2019): \$[/tex]139.09 million
- ROPI (2020): \$128.50 million

These results show how effective the managerial actions have been in sustaining the company's profitability after accounting for the cost of capital. By comparing the ROPI figures of 2019 and 2020, we can analyze the impacts year over year and understand how managerial decisions may have influenced performance.

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