give answer in 2 step with explanation at the end of each step and final answer at the end:PR 8-4 (Algo) (LO 8.5) Assume Phipps Chips, a fictious
snack company... Assume Phipps Chips, a fictious snac

Question

give answer in 2 step with explanation at the end of each step and final answer at the end:PR 8-4 (Algo) (LO 8.5) Assume Phipps Chips, a fictious
snack company... Assume Phipps Chips, a fictious snack
company, makes artisan potato chips in a variety of
flavors. The company sells 12 - ounce bags of a variety
of flavors in grocery store chains such as Whole Foods
and Fresh Market for $8.00 a bag. Use the following
financial data to calculate the ROI, RI, and EVA for
Phipps Chips. Round all numbers and percentages to 2
decimal points. Remember: Interest costs are tax
deductible, so you will need to consider the after - tax
cost of financing debt when calculating EVA. Phipps
Chips Projected Financial DataCurrent Assets$
1,170,000Long - Term Assets$ 2,670, 000Total Assets$
3,840, 000Current Liabilities*Footnote asterisk$
1,120,000Long - Term Liabilities$ 1,661, 000Total
Liabilities$ 2,781, 000Equity$ 1,059, 000Production
units100,000Sales Price$ 8Target ROI15%Fixed Costs$
188,000Variable CostsS$ 1.50Required Rate of Return
14%Income Tax Rate25%Interest Rate and Cost of
Capital10 % *Footnote asterisk Current Liabilities consist
of the current portion of Long - Term
D

VIPSolutions · Accepted Answer

Let's solve each part step by step with explanations after each step.

---

## **a. What is Phipps Chips’ ROI?**

**Step 1: Calculate Net Operating Income (NOI)**

- **Sales:**  
  $ 100,000 \text{ units} \times \$8 = \$800,000 $
- **Variable Costs:**  
  $ 100,000 \text{ units} \times \$1.50 = \$150,000 $
- **Fixed Costs:**  
  $ = \$188,000 $
- **Operating Income (NOI):**  
  $ \text{Sales} - \text{Variable Costs} - \text{Fixed Costs} $  
  $ = \$800,000 - \$150,000 - \$188,000 = \$462,000 $

**Explanation:**  
Net operating income is calculated by subtracting all operating expenses (variable and fixed) from sales.

---

**Step 2: Calculate ROI**

- **Total Assets:**  
  $ = \$3,840,000 $
- **ROI Formula:**  
  $ \text{ROI} = \frac{\text{NOI}}{\text{Total Assets}} \times 100 $
- **Calculation:**  
  $ \frac{\$462,000}{\$3,840,000} \times 100 = 12.03\% $

**Explanation:**  
ROI measures how efficiently assets are used to generate profit. Here, it’s 12.03%.

---

**Final Answer (a):**
**ROI = 12.03%**

---

## **b. What is Phipps Chips’ residual income (RI)?**

**Step 1: Calculate Required Return**

- **Required Rate of Return:**  
  $ = 14\% $
- **Required Return in Dollars:**  
  $ \$3,840,000 \times .14 = \$537,600 $

**Explanation:**  
The required return is what investors expect based on the company’s asset base.

---

**Step 2: Calculate Residual Income (RI)**

- **RI Formula:**  
  $ \text{RI} = \text{NOI} - \text{Required Return} $
- **Calculation:**  
  $ \$462,000 - \$537,600 = -\$75,600 $

**Explanation:**  
Residual income is negative when NOI is less than the required return, meaning value is not being added above expectations.

---

**Final Answer (b):**
**Residual Income (RI) = -\$75,600**

---

## **c. What is Phipps Chips’ economic value added (EVA)?**

**Step 1: Calculate Net Operating Profit After Taxes (NOPAT)**

- **Tax Rate:** $ 25\% $
- **NOPAT:**  
  $ \text{NOI} \times (1 - \text{Tax Rate}) $  
  $ = \$462,000 \times (1 - .25) = \$462,000 \times .75 = \$346,500 $

**Explanation:**  
NOPAT is after-tax profit from operations.

---

**Step 2: Calculate Capital Charge and EVA**

- **Total Assets:** $ = \$3,840,000 $
- **Cost of Capital:** $ = 10\% $
- **Capital Charge:**  
  $ \$3,840,000 \times .10 = \$384,000 $
- **EVA Formula:**  
  $ \text{EVA} = \text{NOPAT} - \text{Capital Charge} $
- **Calculation:**  
  $ \$346,500 - \$384,000 = -\$37,500 $

**Explanation:**  
EVA shows the true economic profit after considering the full cost of capital.

---

**Final Answer (c):**
**EVA = -\$37,500** (rounded to the nearest dollar)

---

## **Summary Table**

| Metric         | Final Answer      |
|----------------|------------------|
| ROI            | 12.03%           |
| Residual Income| -\$75,600        |
| EVA            | -\$37,500        |

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